The vast majority of Offer in Compromise applications either are returned as unprocessable or are rejected. Approximately 16% of Offers are accepted and approved by the IRS. Because the Offer in Compromise is a contract between you and the IRS, you must read IRS Form 656 carefully several times. The Offer contract sets forth your responsibilities. If you fail to comply with any of the contractual provisions, the IRS can and probably will revoke your Offer in Compromise and re-instate the full amount of your original tax debt.
Basis of the Offer in CompromiseYou must request an Offer in Compromise under one of three reasons:
- Doubt as to Collectibility,
- Doubt as to Liability, or
- Effective Tax Administration.
Doubt as to CollectibilityDoubt as to Collectibility means that the taxpayer could not ever pay the full amount of taxes owed to the IRS. The taxpayer does not doubt that he or she actually owes the outstanding balance of tax debts. Doubt as to Collectibility is the primary reason the vast majority of taxpayers request an Offer in Compromise.
Alternatives to an Offer in Compromise based on Doubt as to Collectibility would be a long-term installment agreement, a partial-pay installment agreement, or being declared not currently collectible by the IRS.
Doubt as to LiabilityDoubt at to Liability means that the taxpayer doubts that he or she is actually responsible for the outstanding balance of tax debts. The taxpayer must submit a statement explaining why the tax liability is doubtful. A collection information statement (Form 433-A) does not need to be submitted if you are requesting an Offer in Compromise based solely on Doubt as to Liability.
Alternatives to an Offer based on Doubt as to Liability would be to file an amended tax return, to request innocent spouse or injured spouse relief, to request penalty abatement, or to request an audit reconsideration (PDF). Basically, it may be easier, faster, and less costly to find a way to resolve the underlying tax liabilities than to seek an Offer in Compromise based on Doubt as to Liability.
Effective Tax AdministrationEffective Tax Administration means that the taxpayer is claiming that some exceptional circumstance such that paying the tax would pose a serious economic hardship, would be unfair, and would be inequitable. The taxpayer does not doubt that he or she is responsible for the outstanding tax debts, and does not doubt that the IRS could probably collect the full amount of taxes. Significant economic hardship cases would include very serious health problems. Enrolled agent David Bauman, an offer-in-compromise specialist with JK Harris, advises:
"In submitting an offer based on effective tax administration, the taxpayer needs to provide extensive narrative of the special and extraordinary circumstances along with the rest of the offer in compromise documentation. Right now, extraordinary circumstances would mean some sort of life and death situation, such as a serious medical condition." (Read the rest of David Bauman's interview.)Effective Tax Administration is the least understood of all three reasons, and so the IRS rarely approves an Offer in Compromise based on Effective Tax Administration.
Alternatives to an Offer based on Effective Tax Administration would be to file an Offer based on Doubt as to Collectibility, to seek a long-term installment agreement, requesting a partial-pay installment agreement, being declared not currently collectible by the IRS, or seeking penalty abatement based on reasonable cause.