Why the IRS Accepts Offers in Compromise
To better understand the elements of the Offer in Compromise program, one must first understand what this program is not. First, although the IRS substantially liberalized and broadened the program in 2006 and again in 2012, the OIC is not a lifeline to taxpayers. The overarching concern in any tax enforcement program is the best interests of the IRS, and no matter the context, that goal is always to collect as much revenue as possible. Second, at least as far as the IRS is concerned, an Offer in Compromise is a last resort after everything else has failed. So, an attorney must convince the IRS that the OIC program elements are the only viable way for this agency to fulfil its primary mission, and furthermore, that the taxpayer’s offer is as good as it gets.
OIC Program Elements
To discover what the OIC is, it’s best to look at Section 5.8 of the Internal Revenue Manual, because these are the provisions that guide IRS employees as they evaluate, and hopefully approve, taxpayer compromise offers. According to the IRM, the IRS “will” accept the Offer in Compromise if the:
- Service cannot collect the full amount due,
- Offered amount “reasonably reflects collection potential,” and
- Only other alternatives are closing the case or a payment plan that extends beyond the collection statute of limitations.
If the taxpayer filed the return on time, the SOL usually expires ten years after the tax first becomes due.
Overall, according to 220.127.116.11.4, which is a pre-2012 provision, the elements of the Offer in Compromise program are designed to collect as much revenue as possible as quickly and efficiently as possible, jump-start the taxpayer towards future voluntary compliance, and resolve the matter according to the best interests of “the individual taxpayer and the government.”
Even though the taxpayer’s rights are mentioned first, don’t expect any favors from the IRS during the Offer in Compromise process. In the same document, the Service defines taxpayer fairness first and foremost as “ensur[ing] fairness to the taxpaying public.” In other words, it presumptively isn’t fair to the other taxpayers who pay in full to accept a fraction of the amount due from some individuals.
Overcoming this presumption is a tax attorney’s job.
Elements of a Successful Offer in Compromise
While the philosophical underpinnings so far discussed are of little help to the taxpayer, there is another source, and that is the Taxpayer Bill of Rights. The first nine rights, such as the right to privacy (which the IRS is arguably not doing a very good job of upholding these days), are of no particular help to OIC applicants. But then along comes number 10, which is the right to a fair and just system. Specifically, Offer in Compromise applicants have “the right to expect the tax system to consider facts and circumstances that might affect their underlying liabilities [or] ability to pay.”
In this context, these “facts and circumstances” must normally create a DATC (Doubt as to Collectability). Although the IRS has partially abandonded the one-size-fits-all DATC analysis, the mindset persists. So, along with the initial application, it is normally a good idea to present as much documentation as possible about the taxpayer’s current and potential financial hardships. In an agency that lives and dies by specific definitions and numeric guidelines, there really are no definitions for many of the specific OIC program elements. That’s very good news for applicants, because this absence gives an attorney room to operate, and that’s all a good attorney really needs.