Offer in Compromise Process
Offer in Compromise Process
As illustrated in the figure on this page, the offer in compromise process starts when an offer application is submitted by a taxpayer. The application package, Form 656, consists of over 50 pages that include detailed instructions on determining eligibility for filing an offer in compromise and a worksheet for calculating the offer amount for individual and business taxpayers. The offer in compromise must be supported by a current statement of the taxpayer’s financial condition, including data on assets, liabilities, and monthly income and expenses.
The IRS typically receives and begins the processing of offers in one of two centralized offer in compromise offices by assessing the offer in compromise types. The first step is screening out offers based on doubt as to liability (DATL). DATL offers involving trust fund recovery penalties and personal liability for excise taxes are processed by the Offer in Compromise Program and all others are referred to the IRS examination staff. The IRS then screens the remaining offers for processability, using five criteria:
- Current version of Offer in Compromise application form used
- $150 application fee included
- All required federal tax returns filed
- Employment taxes current
- Taxpayer not in bankruptcy proceeding
Generally, if any of the five requirements are not met, the application is returned to the taxpayer as “not processable.” According to IRS officials, since fiscal year 2003, the requirement to use the current application form has not been enforced although it remains part of IRS’s processability criteria. Program officials said that they do not want to return offer applications to taxpayers solely because the most current form was not used.
Next, the IRS screens out taxpayers who, based on their self-reported financial data, can fully pay their tax debts. The financial data include income, assets, and living expenses. If, after subtracting the taxpayers’ self-reported living expenses from their income and assets, IRS determines taxpayers can fully pay their tax debt and no exceptional circumstances exist, the offers are rejected without further processing.
The IRS then sorts offers by complexity. Complex offers, such as those that are business related or those from individual taxpayers required to file Schedule C (Profit or Loss from Business), are generally sent to field offices. The less complex offers remain in COIC for processing. Next, the IRS reviews each offer to determine whether the taxpayer provided enough financial information for a decision to be made about whether to accept the offer. If not, the IRS requests more information from the taxpayer. If the taxpayer does not provide the information, the offer is returned and the offer is closed. A returned offer is not considered rejected, but it is closed.
When the IRS has sufficient financial information to make a decision, it first determines whether an offer can be accepted on the basis of doubt as to collectability (DATC). If not, IRS considers the offer under Effective Tax Administration (ETA) rules. At any point during the offer in compromise process, taxpayers may withdraw their applications.
The step of rejecting an offer includes an administrative review. When Offer in Compromise staff propose rejecting an offer, the IRS is required by the Restructuring Act to conduct an independent administrative review. If the offer is rejected, the taxpayer has the right to appeal the decision. Offers that are returned, withdrawn, or deemed unprocessable do not have appeals rights (Offer in Compromise Background). If the IRS accepts the offer, it monitors the taxpayer for 5 years to ensure that the taxpayer remains compliant with the agreement and future tax obligations.
Simplified Offer in Compromise process flow