7.3.3 Process

An OIC is initiated by filing a Form 656, which requires information and supporting documentation of the taxpayer’s income, assets, and expenses. The filing fee is a non-refundable $186. However, the fee may be waived for a taxpayer whose income is below 250% of the poverty line.1 A taxpayer must file all required tax returns in order for an OIC to be considered. This may lead to the taxpayer incurring more liability before all of the liability can all be settled with an OIC. You may need to request CNC status for your client while the tax returns are being processed or the OIC is being prepared. Collection actions are suspended while the OIC is being processed by the IRS. 

The purpose of the Offer in Compromise program is to settle tax debts for the maximum amount that the taxpayer can pay from net current assets and future income potential. The amount of the offer is computed as the sum of net realizable assets2 and gross income minus necessary living expenses. Even if the computed “offer” amount is zero, the taxpayer must still offer at least $1. The Internal Revenue Manual has extensive rules on how the maximum collection potential is determined.3 After the filing of the Offer, an attorney will often need to advocate with the IRS for the proposed offer amount. The Internal Revenue Manual rules are useful in this advocacy since the IRS is supposed to follow them.4 IRS requests for additional information should be timely responded to.

The IRS may allow the taxpayer to pay off the debt in a lump sum payment or in installments over a period of time, usually between 6 months and 2 years.5  In the latter case, the taxpayer will be given a fixed monthly payment amount. Be sure to structure a realistic compromise that provides the taxpayer with adequate means for basic living expenses.

If an OIC is accepted, a taxpayer must file tax returns and pay taxes owed for the next 5 years. Non-compliance could result in a default and enforcement of the compromised taxes by the IRS. Be sure to advise your client of the duty to file and pay taxes per the OIC agreement. Document your advice in writing.

Levy is suspended while an OIC is pending or in effect.6 The IRS is not required to release a prior levy upon the taxpayer’s filing of an OIC. However, it will usually release the levy if the taxpayer shows economic hardship. 

A “rejection” of an OIC may be appealed to the IRS Appeals Office.7 The rejection notice should state specific reasons why the OIC was not accepted so the taxpayer can respond in an appeal. Levy is suspended pending an appeal.8 If the OIC was submitted as part of a collection due process hearing, the rejection may be appealed to Tax Court under an abuse of discretion standard.9

If an OIC is “returned”, this means that the OIC was incomplete and that the OIC agent attempted to contact the taxpayer and/or the representative but did not get a response. The IRS takes the position that a “returned” OIC cannot be appealed and that the only remedy is to submit a new OIC. Some OIC agents seem to quickly return an Offer without giving adequate time to respond or even ignore phone messages or faxes sent by the taxpayer. If this is the case, the matter should be appealed to the OIC agent’s supervisor and possibly IRS Appeals. 

• 1Use Form 656A for waiver of the fee.
• 2“Net realizable assets” equals the Quick Sale Value of an asset (generally 80% of fair market value) minus the first encumbrance, fix-up costs, broker fees, etc.
• 3I.R.M. 5.8.5; 5.15.
• 4Fairlamb v. Comm’r, T.C. Memo 2010-22.
• 5I.R.M. 5.8.1.10.4.
• 6I.R.C. § 6331(k).
• 7I.R.C. § 7122(e); see I.R.C. §§ 6320, 6330; Rev. Proc. 2003-71 (Collection Appeals Program). Returns of Offers for additional information are not “rejections.”
• 8I.R.C. § 6331(k).
• 9See, e.g., Blosser v. Comm’r, T.C. Memo 2007-323; Samuel v. Comm’r, T.C. Memo 2007-312.