An Overview of The Offer in Compromise Program
Most of us have seen the television commercials. “I hadn’t filed a tax return since the George W. Bush administration and the IRS was threatening to levy my blood plasma. Then I called The Tax Terminator. All my IRS problems vanished, and I also received a lifetime tax exemption.” It would be nice if qualifying for the Offer In Compromise Program was that easy, but unfortunately, that’s simply not the case. However, for those with a large income tax debt, and who can meet the Offer In Compromise Program’s qualifications, significant relief is often available. So, the Offer In Compromise is one of the most commonly-used tools in delinquent income tax situations.
How We Got Here
26 U.S.C. 7122 has been around since at least the 1970s in one form or another. The law gives the IRS broad authority to compromise “any” tax matter, and provides the same authorization for the Attorney General in revenue-related criminal cases.
In the first decade of this century, program acceptance rates usually hovered at around 25 percent.
Then, around 2010, some things started changing at the IRS. For one thing, the bean counters began cutting the Service’s budget almost every year, which meant that some resources had to be reallocated. About that same time, allegations surfaced that the IRS scrutinized the tax-exempt status of organizations on both the far right and far left. Basically, any group with a name that included “Tea Party” or “Occupy” became a target. Although the FBI eventually decided there wasn’t enough evidence to pursue the matter, someone may have decided that the IRS needed an image makeover.
So, in 2012, the IRS launched its Fresh Start initiative. Since then, the Offer-In-Compromise acceptance rate has been above 40 percent almost every year.
For the most part, the OIC is not an equitable relief program (“gimme a break” type stuff). There are qualifications in place, but as evidenced by the rising acceptance rates, these standards are not as rigorously enforced as they were six or seven years ago.
- Doubt as to Liability: There is a DATL if the taxpayer did not receive any notice of adverse action and has had no prior opportunity to dispute the amount owed. But since there is no DATL if the IRS produces a prior notice, this provision is almost never used, unless the case is one of the very rare ones that fell through the cracks.
- Doubt as to Collectability: Now we’re getting somewhere. If the taxpayer lacks the capacity to pay the account in full, there is a DATC. To make this determination, the IRS usually uses the formula (taxpayer’s monthly disposable income) times (the number of months remaining under the statute of limitations) plus (taxpayer’s net equity in fixed assets, such as a house).
The net equity calculation is normally based on 80 percent of the asset’s fair market value. So, if the taxpayer has a house with a $200,000 fmv and a $100,000 mortgage, the net equity for offer in compromise purposes is $60,000 ($200,000 x 0.8 – $100,000), and that amount must be included in the OIC.
- Effective Tax Administration: In some cases, the Service will approve an offer in compromise based on Effective Tax Administration. The taxpayer qualifies for an ETA if “compelling public policy or equity considerations identified by the taxpayer provide a sufficient basis for accepting less than full payment.” That usually means something like a crippling physical or mental disability.
In a future post, we’ll take a closer look at the Offer In Compromise Program as a whole.