As you all know, the Offer in Compromise (OIC) is a program administered by the Internal Revenue Service which allows taxpayers to settle their tax debt for less than the full amount they owe— essentially allowing them a fresh start with the IRS.

For tax professionals, this is a useful program to look into if you have clients who are struggling to pay their state or federal tax debt. In 2018, the IRS accepted 24,000 Offer in Compromises, totaling over $261.3 million in compromised back tax debt. While that may seem like a lot, they also rejected 35,000 offers.

Is Offer in Compromise right for your client?

Before the IRS will even consider an Offer in Compromise, the taxpayer must meet eligibility requirements.

Eligibility for Offer In Compromise

• Have all tax returns filed
• Must Be Paid Current in Current Tax Year
• No Open Bankruptcies

Keep in mind, while certain qualifications and requirements are set in stone, the IRS Revenue Officer reviewing the taxpayer’s case will take into account all aspects of your client’s situation. Your client’s lifestyle will play a huge factor in whether or not the specialist recommends them for OIC. If you claim that your client can’t pay their full tax debt but they drive a brand new Mercedes and live in a $2 million house, the Revenue Officer is going to having a hard time accepting a Doubt as to Collectibility Offer in Compromise. 

The IRS collects most of their information about your client’s financial situation using Form 433-A (OIC), but the rest of the information is gathered through investigation.  Remember, the super computer over at the IRS will oftentimes uncover data that you never knew existed.  You client better be prepared to do some explaining.  

If you are able to justify your client’s abnormally high cost of living due to special circumstances, the offer specialist will take that into consideration (usually via Effective Tax Administration). Just because your client has equity in their house or vehicle doesn’t necessarily mean the IRS expects them to sell those things to pay their debt. 

One final thought to keep in mind in regard to your client’s ability to pay: while an offer is being reviewed (a process that can last several months), your client’s income and assets will be under ongoing review to make sure that at no point they become able to pay their tax debt.

Applying for Offer in Compromise

In order to submit the actual OIC application, the following forms may be required (depending on your client’s situation).

IRS Form 656- Offer in Compromise

This is the form required to make the offer. This form outlines the agreement between the taxpayer to pay a certain amount to cancel their outstanding debt with the IRS.

IRS form 433-A (OIC) – Collection Information Statement

This is the form the IRS uses to determine a taxpayer’s financial hardship. The taxpayer must list all their income, expenses, assets, and liabilities. If approved for an OIC, this form will often have to be resubmitted so the IRS can ensure that there have been no changes that would allow the taxpayer to afford to pay the tax debt. The IRS can demand that the taxpayer resubmit this form at any time to reflect their current income and expenses. 

Supporting Documentation

The IRS isn’t just going to take your word for it.  Every bit of information that you have included on the forms to submit your Offer in Compromise must be backed by proof.  Common offer packages include:

• 3 Months Paystubs from all sources of Income
• 3 most recent months of bank statements. All pages, all accounts
• YTD Profit/Loss Statement from your business.
• Lease agreement or mortgage coupon on your residence
• Automobile Payment
• Utility Bills

You get the idea.  Remember, an Offer In Compromise is a request to the IRS to “charge-off” a balance due.  Before they are going to agree to do that, they are going to take you through an thorough investigation to determine whether or not you have the ability to repay them.

Common OIC form mistakes to avoid

I can’t over emphasize the importance of completing the Offer forms correctly, without mistakes.  Mistakes can vary in importance.  Sometimes mistakes will only cause confusion and stall the case until the mistake can be clarified. Other times, mistakes can lead to an outright rejection of the offer. In either case, mistakes can lead to lengthy (and sometimes expensive) delays at the expense of the taxpayer.

Here are some common mistakes:

Bad Math

It may come as a surprise, but one of the most common mistakes is simply bad math. Not because CPAs and EAs are bad at math but because perfectly filling out a Form 433 is hard. It requires juggling dozens of complex numbers and figures, not to mention all the explanations and supporting documentation that accompany the numbers. It’s no wonder the ball gets dropped sometimes. 

Unfortunately, when that ball does get dropped—a quick-sale value is calculated incorrectly or an expense is included in the wrong calculation—the whole OIC process has to come to a screeching halt until the mistake is sorted out.   

Incomplete Sections

Think for a moment from the eyes of the IRS Revenue Officer… Are the sections in the forms left blank because they don’t apply to a taxpayer or because the section was overlooked and rushed to completion?  Was it completed in a hurry to get off the tax professionals desk or did they not have any idea on what they were doing?  It’s a shame because something as simple as “N/A” could answer that question for the IRS and the OIC application can get the full attention and understanding it deserves.

Report Negative Equity as $0

When a taxpayer’s property was worth less than they owed on it, the practitioner cannot use the negative equity to offset equity in other assets.  Any asset with negative equity should simply be reported as $0

Negotiating an Offer in Compromise

If your client’s OIC is rejected, you can submit an appeal via Form 13711 within 30 days of the date of the rejection notice. The appeal needs to address the issues raised in the OIC rejection and the taxpayer will likely have to provide additional documentation. If accepted, the appeal will allow the taxpayer the opportunity to renegotiate their rejected offer under more acceptable terms for the IRS. 

To argue any of the grounds for appeal you need to be prepared to support your position with records, evidence, and procedures. An appeal is essentially a discussion between the appeals officer and you on behalf of your client, and all appeals decisions are final. If you want to win an appeal, you have to justify your client’s position by referencing your documentation and tying it together with the IRM, IRC, and court decisions correctly.

Keep in mind, ex parte communications are prohibited in the IRS which means an appeals officer cannot talk about your client’s case with the offer specialist who rejected it. Because of the unbiased nature of appeals officers, you can make your original case to them if you believe you have already included sufficient evidence. If your client’s offer was rejected based on lack of evidence, you’ll want to strengthen your case before sending it to Appeals. If you’ve already exhausted IRM and IRC references, try using case law.  

Additionally, it can be effective to play to the emotional side of the argument—appeals officers are human after all—but it should be the “cherry on top” of your argument, not the basis. During my time at the IRS, I never lost an appeal hearing because I rooted my arguments in the IRM and IRC, and you can expect other IRS officers to do the same.    

Although the IRS still declines more offers than it accepts, the acceptance rate for offers in compromise has increased from 25% in 2010 to around 41% in 2018.  The best thing to do to increase your chances of success is to be sure you can back up the foundation of your client’s case in facts and IRM references, as well as complete all forms as accurately and thoroughly as possible.

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