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IRS Audit – Offer in Compromise

An offer in compromise (OIC) is a procedure for settling unpaid tax accounts (after an IRS audit or otherwise) for less than the full amount of the assessed balance due.  The offer in compromise must cover all taxes, interest, and penalties owed.  The IRS may accept an offer in compromise when it is unlikely that the tax liability can be collected in full and the amount offered reasonably reflects the collection potential. Once an offer in compromise is accepted, a contract exists whereby the taxpayer must comply with all the terms of the offer in compromise in exchange for the IRS’s agreement to reduce the tax liability owed.

The objectives of the offer in compromise program are: (1) to effect collection of what could reasonably be collected at the earliest time possible and at the least cost to the government; (2) to achieve a resolution that is in the best interest of both the individual taxpayer and the government; (3) to give taxpayers a “fresh start” to enable them to voluntarily comply with the tax laws; and (4) to collect funds that may not be collectible through any other means.

The IRS cannot reject an offer in compromise from a low-income taxpayer, or any taxpayer regardless of income level, solely on the basis of the amount offered by such taxpayer. A low-income taxpayer is a taxpayer who falls below a set dollar criteria.

IRS Form 656, Offer in Compromise, sets forth requirements applicable to the taxpayer and the IRS. The offer in compromise requires the taxpayer to keep current on the taxpayer’s payment and filing requirements for five years from the date of acceptance of the offer in compromise. The taxpayer also must return any refund received for all tax years up to and including the year the offer is accepted. The IRS will abate the tax liability after the offer in compromise amount plus any interest due on the offer has been paid in full and the tax return for the year of the offer acceptance has been filed. The IRS waits for the return to be filed before it reduces the tax liability to zero so it can offset any refund arising from the tax return due for the year of acceptance of the offer.

Before 1998, two grounds existed for accepting offers in compromise: (1) doubt as to liability; and (2) doubt as to collectability.  The 1998 IRS Reform Act added a possible third basis for acceptance of an offer in compromise — the “promotion of effective tax administration.”

The acceptance or rejection of an offer in compromise is solely within the discretion of the IRS. However, if the IRS does not reject an offer within 24 months after the date of submission, it is deemed to have been accepted. Section 7122 prescribes the sole method for compromising a tax liability and strict statutory compliance is required.

Erik Lincoln is a founding member of Lincoln. In addition to being an attorney he is also a CPA. Erik has consistently been recognized as one of the top attorneys in North Carolina, by Business North Carolina.