An offer in compromise is an agreement made between a taxpayer and the IRS in order to settle a tax liability with a payment of less than the full amount owed. In order to request an OIC, a taxpayer must submit Form 656 along with an application fee of $186. They must also include a nonrefundable payment equal to 20 percent of the offer amount, or the initial periodic payment. (Note that the fee and payment requirement depends on the type of offer and whether the taxpayer qualifies for the low-income exemption or if they are filing a doubt as to liability offer.) If the IRS does not make a determination on an OIC within 24 months, it can be deemed as accepted.
A new report from the Treasury Inspector General for Tax Administration acknowledges that the IRS has made progress in their OIC process since 2012. Improvements listed include:
- Updated application forms
- An online pre-qualifier tool
- Offer specialists to work on payroll service provider cases
- Taxpayer education as to why the offers actually benefit them
Despite these improvements, both TIGTA’s report and the National Taxpayer Advocate’s Annual Report to Congress agree that this process continues to be one of the most serious problems affecting taxpayers. Several key issues noted by TIGTA included:
- OICs not always processed in a timely manner
- Taxpayers not always contacted by the promised date
- Interim letters not always sent when dates aren’t met
Furthermore, in 10 out of 92 rejected cases in TIGTA’s sample, there was no documentation included to indicate that alternative resolutions were discussed with the taxpayer.
As a result of their findings, TIGTA recommends the IRS remind its employees of the requirement to complete the processing determinations for OICs within the required period of 16 days, and contact taxpayers within 120 days. Employees also need to be made aware of requirements for sending interim letters when the initial 120-day contact date is not met. The IRS must update its review guidance to include verification – and documentation – that alternative resolutions have been discussed when offers are not accepted. Lastly, TIGTA suggests IRS management place a heightened focus on discussing alternate resolutions in operational review of subordinate managers and in refresher training.
Fortunately, the IRS has agreed with TIGTA’s recommendations, stating it would issue a memorandum to employees and managers notifying them of the above required changes. The IRS also pointed to the success of its online pre-qualifier tool in streamlining the OIC process and its Fresh Start initiative.
“This easy to use online tool helps taxpayers determine whether they meet basic eligibility requirements, are a good offer candidate given their financial circumstances, and what a reasonable offer might be given their circumstances,” said Karen Schiller, commissioner of the IRS’s Small Business/Self-Employed Division. “Taxpayers who use the tool have a higher acceptance rate than those who do not. Since the implementation of Fresh Start procedures in 2012, the OIC acceptance rate as a percentage of dispositions has increased from 34 percent in fiscal year 2011 to 44 percent in fiscal year 2015.”
Remember, it’s always a good idea to stay informed about IRS processes and your rights as a taxpayer. Should you find yourself needing to make an offer in compromise, or if you ever have questions regarding any tax process or procedure, Polston is here to help. Check out our services page and fill out the form for a free consultation. Or give us a call 844-841-9857.