New Law Sets Hurdles for Offer in Compromise Program

By filing an Offer in Compromise, you are offering to pay less than the full amount of your tax debts to the Internal Revenue Service. The IRS, at its discretion, may accept less than full payment of your tax debts if there is doubt as to whether the IRS could ever collect the full amount of tax debt or if there is doubt as to whether you are actually liable for the tax debt.

Under The Tax Increase Prevention and Reconciliation Act, taxpayers who submit an offer in compromise on or after July 16, 2006, will face new rules and processing procedures.

The biggest change: taxpayers will need to beging making payments with their offer in compromise. With an offer in compromise, you can choose two payment options: full payment of the offer amount within 90 days of notice that the IRS has accepted your offer, or monthly payments over a period of not more than 24 months from the date your offer is accepted.

Under the new tax law, taxpayers must pay 20% of the offered amount if they plan to make a lump sum payment. Taxpayers requesting a monthly payment plan must start making their proposed monthly payments immediately, and continue making their payments while the IRS processes their offer in compromise.

If taxpayers fail to leave a 20% downpayment or if they skip any of their monthly payments, the IRS will consider the offer in compromise withdrawn, and taxpayers will need to make alternate arrangements to settle their tax debts.

The next biggest change: the IRS must process offer in compromise applications within 24 months. If the IRS fails to complete processing within 24 months, the offer in compromise will be considered accepted by the IRS.

According to their own statistics, the IRS takes an average of 380 days to process an offer in compromise. I have seen offers take as long as 18 months from initial submission to notice of acceptance.

There's another, minor changes in the offer in compromise program that will benefit taxpayers. The $150 offer in compromise application fee will be used to lower the taxpayer's federal tax debts. Also, the taxpayer may specify how the IRS should apply the 20% down payment or the monthly payments.

However one change in the tax law definitely benefits the IRS. Any offer in compromise that does not meet the down payment or monthly payment requirements will be rejected by the IRS as unprocessable.

More information:

• Offer in Compromise Essentials
• Full text of the Tax Increase Prevention and Reconciliation Act of 2005 (see Section 509 of the new law for the offer in compromise provisions)
• Summary of the Tax Increase Prevention and Reconciliation Act
• Settling IRS Debts (interview with offer in compromise expert David Bauman)
• Questions to ask when hiring an Offer in Compromise Specialist
• Offer in Compromise Forms and Documentation
• How to Prepare IRS Form 656
• How to Prepare IRS Form 433-A
• How to Calculate Your Offer in Compromise Amount
• How to Handle Tax Refunds in an Offer in Compromise

From the IRS:

• New Law Revamps IRS Offer in Compromise Program (IR-2006-106)
• Revamped Offer in Compromise Program Plays New Role in Collection Process (FS-2006-22)
• Downpayments for Offers in Compromise (Notice 2006-68, PDF, 9 pages)