The Offer in Compromise Process

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The Offer In Compromise Process Discussed And Explained By Joe Mastriano, CPA.

The Offer In Compromise is one of the most popular methods of tax resolution used by taxpayers who can’t pay their taxes. The IRS has adopted rules to deal with the numerous offers they receive each year.

The IRS has two major processing centers. These units are located in Memphis, TN and Brook haven, NY. Previously, offers were submitted directly to collection offices in the field. Each state had at least one collection office processing OIC’s. Even with this change, revenue officers still will submit offers for taxpayers, and offers will be processed in other locations.

In an attempt to aid in processing, when you submit an OIC, the IRS will first verify that the offer is “processable.”  Processing your offer requires that the following be met:

  • 1. The taxpayer filing the offer must have filed, or will file shortly, all past-due tax returns.
  • 2. The tax periods included in the offer cannot be included in bankruptcy.
  • 3. The taxpayer must have included a $150 processing fee, or completed and qualified for a hardship waiver of the fee.
  • 4. The tax periods in question cannot be part of an open audit.

If the offer is not processable, it will be returned along with any fees submitted.

Then comes the offer verification… The financial statement and the backup for expenses and income will be examined. Any additional support documentation will be considered. If it is determined that additional documentation is needed a letter will be sent requesting the information, along with a due date for it. The IRS will normally give the taxpayer 10 days to two weeks to provide this information. Offers are often returned as rejected, and the fee kept by the IRS, when the information is not given timely. No problem, if that happens you can just resubmit the offer with the necessary information and fees.

After all the information is gathered, the offer professional will then determine how much the taxpayer should pay as a “reasonable collection potential”. There will be a worksheet for the asset portion, and a worksheet for the income and expense portion. If the offer is not rejected, the IRS may accept the OIC, or they could send a letter containing a summary of their collection potential analysis. The taxpayer can then either accept the offer or not. Or the taxpayer could dispute the analysis and provide reasons and documents to support the disagreement. The taxpayer may just accept any increased offer amount that the IRS makes.

I’ve had offer professional skip some of these steps. Often going right to the rejection, or to the analysis of what they think the offer amount should be. Don’t be intimidated if they act like they are not interested in your side. There may be a quota they are trying to fill, the offer professional may be trying to get rid of certain cases, etc. Offers must be aggressively defended, or you will become one of the large percentage of taxpayers with rejected offers that have to do a payment plan for the full amount.

After discussing any disagreements with the offer professional, and their manager, you may still think you have a case. If so an offer appeal is probably the way to go. Knowing how appeals are considered in each location is very critical. I have found appeals in Houston to be ineffective, unless you are appealing the valuation of an asset. Appeals in Manhattan are willing to make rulings on any matters they desire to. Things change often at the IRS, so nothing should be taken as gospel. As always offers should be filed and negotiated with the help of a professionally licensed firm.

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The offer in compromise process is not something you should handle on your own, contact our offices today!

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