4 Step Analysis for Processing Offers in Compromise
The Offer in Compromise Program is one of the best ways to reduce tax debt. While the Offer in Compromise Program’s length varies greatly, it is not unusual
to see taxpayers who owe tens of thousands of dollars have their debt reduced to almost nothing. Alas, the opposite is also true, as it is also not unusual for the IRS to flatly deny these applications, because the taxpayer simply does not qualify.
After an initial screening (more on that below), the IRS determines whether the taxpayer’s offer qualifies for relief because of a:
- Doubt as to Collectability: Most OIC cases invole a DATC. Briefly stated, the taxpayer’s liability must exceed the RCP (reasonable collection potential), which is essentially the money that the IRS can get from the taxpayer before the statute of limitations expires.
- Effective Tax Administration: If the taxpayer has an economic hardship, which in this context usually means that repaying the entire tax debt would put the taxpayer below the poverty line, the IRS may agree to an OIC.
- Doubt as to Liability: A few people reduce tax debt because they are innocent spouses, the IRS did not deliver all proper legal notices, or there is some other legal loophole.
Pursuant to Section 5 of the Internal Revenue Manual, the OIC is not a tool to reduce tax debt, but rather a means to “[s]ecure collection of revenue that may not be collected through any other means” in a way that “is in the best interest of both the individual taxpayer and the government.”
Before you get that life-changing new job, you must meet the minimum qualifications. The same thing applies if you want to reduce tax debt. Their preliminary qualifications are:
- No Pending Bankruptcy: Section 362 of the Bankruptcy Code (the automatic stay) probably applies to
Offer in Compromise proceedings, because they constitute an attempt to collect a debt. The fact that the OIC is a collaborative process may change that result, but the IRS takes no chances.
- Proper Paperwork: In most cases, that means Form 656, which is the application form, and Form 433-A (statement of income). DATL applicants do not need to file the income statement, in most cases.
- Payment: A 20 percent down payment, or the first installment payment, must accompany the application. Note that if the IRS rejects your application, the Service keeps the money.
- Good Faith: If the IRS concludes that the OIC application is simply a means to delay the collection process, it will not process the application.
A good start in this phase usually reduces the offer in compromise program’s length.
Average time for this phase: 3-6 weeks
Next, the IRS assigns a claims examiner to determine the merits of the OIC claim. The notice letter may seem insignificant, but it means that your claim is moving forward through the system, albeit at a very slow pace. Furthermore, this letter often contains that delightful phrase “hold on collections actions.”
Average time for this phase: 4-6 weeks
The bulk of the offer in compromise program’s length usually occurs in this stage. While the 433-A is the starting point for this investigation, it is an investigation and not merely a review. Typically, the examiner independently verifies a few items, such as a home’s value, and if there are discrepancies or red flags, the entire application goes under a microscope. If that’s not the case, depending on the investigator’s workload, the application may essentially get a rubber stamp.
Average time for this phase: 4 weeks to 8 months
If the examiner rejects your initial offer, you can counter-offer, assuming there are factors in your favor which the examiner did not fully consider. The examiner may also allow the taxpayer to increase the offer, and we all know that money talks.
Average time for this phase: 8-12 months
For those of you keeping score at home, the Offer in Compromise Program’s length is usually between fourteen and twenty-four months. That’s a long time, but by IRS standards, not an unreasonably long time.