The Offer in Compromise

            Internal Revenue Manual 5323 Section 3462 of the Internal Revenue Service Restructuring and Reform Act of 1998 imposes a duty on the Internal Revenue Service to allow more flexibility in the use of its allowable expense standards. Revenue Officers and employees of the Collection Division are not allowed to use standard schedules to the extent that such a use would result in the fact that the individual would not have enough funds to provide for living expenses.  Section 3462 should force the IRS to look at the actual expenses of the taxpayer and not rely on its arbitrary determination of the appropriate housing expenses.

            An Offer in Compromise is submitted on a Form 656.  The individual seeking the Offer must also include a Form 433A and a Form 433B if he is self-employed. The Offer should include a discussion setting forth the reasons that an offer in compromise is appropriate.  The submission of the offer waives the statute of limitations for collection for the duration of the offer plus one year thereafter.  The Reform Act of 1998 prohibits the IRS from collecting a tax liability by levy (1) during any period that a taxpayer's offer in compromise for that liability is being processed, (2) during the 30 days following rejection of an offer, (3) during any period in which an appeal of the rejection of an offer in being considered, and (4) while an installment agreement is pending (IRC 6331(k)).

            The IRS uses a formula that combines an analysis of the current net worth with a determination of the taxpayer's future ability to pay. In March of 1999, the IRS created a new offer referred to as a Deferred Payment Offer, which allows an individual to pay the discounted value of his assets plus monthly payments for the remainder of the statute of limitations for collection.

            When the IRS receives an offer in compromise, it is sent to an offer coordinator for the IRS district where it is reviewed.  The offers are reviewed to determine if the individual is currently paying taxes, has filed all tax returns and is not currently involved in a bankruptcy proceeding.  Once it is determined that an offer can be processed, it is sent to the service center for a search of the tax records to determine the exact amount of the tax due.  The offer will not be processed if the individual is not currently filing returns and paying current taxes.

            The offer is then sent to a Revenue Officer for further investigation.  Offer in Compromise specialists do the investigation, The individual may be required to submit financial records, bank statements, etc. 

            There are three basic plans for the payment of the offer in compromise.  The offer may be paid in cash within 90 days of acceptance.  The individual should offer the realizable value of his assets (quick sale value) plus the total amount that the IRS could collect over 48 months of payments. 

            The IRS basis its acceptance of the offer with the following formula:

Quick Sale Value Plus Present Value of Income Equals Offer in Compromise (QSV + PVI = OIC).  The IRS determines the Quick Sale Value of al the client's assets and then adds the amount of the present value of the ability to pay.

            The IRS also has a short-term payment offer.  This offer requires that the amount be paid within two-years of acceptance.  The offer must include the quick sale value of current assets plus the amount that the IRS could secure in 60 months or the remainder of the ten-year statutory period for collection, whichever is less. 

            There is also a deferred payment option that requires payment of the offer amount within the remaining statutory period for collecting the tax.  This must include the realizable value of your assets plus the amount that the IRS could collect through monthly payments during the remaining life of the collection statute. There are several options. The firs option is to pay the full payment to the realizable value of your assets within 90 days from the date the IRS accepts your offer and your future income in monthly payments during the remainder of the statue for collections.

            The second option is a cash payment for the realizable value of your assets within 90 days from the date the IRS accepts the offer and monthly payments during the remaining life of the collection period for both the balance of the value of your assets and your future income.  The third option is the entire offer amount in monthly payments over the life of the collection statute.

            In determining the amount of the offer, the IRS uses a quick sale value of assets.  The IRS also looks at the amount that can be collected from future income.  Pension plans can be a problem in an offer in compromise. The Internal Revenue Manual gives the following guidelines:

"(1) Where under the terms of employment, a taxpayer is required to contribute a percentage of his gross earnings to a retirement plan and the amount contributed, plus any increments, cannot be withdrawn until separation, retirement, demise, etc., this asset will be considered as having no realizable equity.

(2)  Where the taxpayer is not required as a condition of employment to participate in a pension plan, but voluntarily elects to do so, the realizable equity for compromise purposes shall be the gross amount in the taxpayer's plan reduced by the employer's contributions.  However, in these situations each case should stand on its own merits.

(3) If the taxpayer is permitted to borrow up to the full amount of his equity in a plan, this should be taken into consideration in the computation of realizable equity.

(4) The current value of property deposited in an IRA or Keogh Act Plan Account should be considered in the computation of realizable equity. Cash deposits should be included at full value.  If assets other than cash are invested (e.g. stock, mutual funds), the IRS should be valued at the quick sale value, less expenses.  The penalty for early withdrawal should be subtracted in computing net realizable equity."

            The Revenue Officer generally accepts the valuation of personal items that is listed on the financial statement.  If the taxpayer has jewelry, paintings, antiques, coin, stamp or gun collections, the Revenue Officer will probably look closer at the situation. 

            The IRS may grant special relief for property that is held in tenancy by the entirety because they cannot seize it if the spouse does not owe back taxes.  (IRM 57(10)(13).92.  If property is held in joint tenancy or tenancy in common, the IRS will want a 50% chunk of the value.

            The Revenue Officer will look at the individual's budget as it is shown on the Form 433A.  He will also look at the future job prospects of the taxpayer including his education, profession, age. experience, and past income.  The IRS will determine a present value based on the individual's ability to pay.  If the citizen makes a cash offer, the Service will decide how much he can pay per month and then multiply it by 48 months to determine its present value.  If the individual requests a short term deferred offer, the IRS will use 60 months to determine the present value unless there is less than five years on the statute of limitations.