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FALL 2006 • Vol. XLV
- Cy Pres
- Changes in the Rules Governing IRS Offers in Compromise
- Brooklyn Law School Alumni Reception
- The Firm Highlights
- A Date to Remember

Changes in the Rules Governing IRS Offers in Compromise

by Barry C. Feldman, Esq. and Barry C. Feldman, Esq.

In general, federal tax liabilities may be compromised, at the discretion of the IRS, either based upon doubt as to the liability of the taxpayer for the tax or based upon doubt as to the collectibility of the tax from the taxpayer. In order to commence the offer in compromise process, a taxpayermust complete an IRS form and submit it with a $150 application fee. The fee is waived for (i) offers made by low-income taxpayers and (ii) offers based solely on doubtas to liability. (A low-income taxpayer is an individual whose income falls at or below poverty levels based on guidelines established by the U.S.Department of Healthand Human Services.) If the offer is based upon doubt asto collectibility, financial statements are required.

Recently, the IRS published an information release (IR2006-106) and a fact sheet (Fact Sheet 2006-22), explaining how recent changes in the law will affect the way the IRS's offer in compromise (OIC) program will operate. These changes have already taken effect. The new rules classify offers as either "lump-sum offers" or "periodic payment offers." A periodic payment OIC is any offer made that proposes to pay the amount offered in settlement of the taxliability in more than five (5) installments. All other offersare treated as lump-sum offers.

Under the new rules, certain non-refundable payments must be submitted with the offer except, as with the $150 application fee, for (i) offers made by low-income taxpayers and (ii) offers based solely on doubt as to liability. A lump-sum OIC must now include simultaneous submission of a non-refundable payment to the IRS equal to 20% of the offer. For taxpayers submitting a periodic payment OIC, the offer must be accompanied by the payment of the amount of the first proposed installment and any additional installments under the offer must be made as they become due while the offer is pending before the IRS. The initial installment payment and any subsequent installment payments are non-refundable. Any failure to make a subsequent installment payment while the offer is being evaluated by IRS will be treated as a withdrawal of the offer.

Because the payments are non-refundable, the taxpayeris permitted to specify how the payment(s) are to beapplied (i.e.,to which tax liability,to interest or to penalties). If,at the time the offer is submitted, the taxpayer failsto specify, in writing,how to apply the payments to the tax, penalty and interest due, the IRS will apply the payments as it pleases.

One positive change in the rules is that compliance (i.e.,that you have filed all tax returns due to the date of the sub-mission of the OIC) will no longer be a criterion for processing OIC initial submissions. If compliance is the only issue, the offer may be processed. However, the IRS will contact the taxpayer by either telephone or correspondence requesting the delinquent return(s), and/or the required estimated tax payment(s).

An OIC will be deemed accepted if it isn't withdrawn, returned, or rejected within 24 months after receipt by theIRS. The 24-month time period does not include any time periods during which a liability included in the OIC is thesubject of a dispute in any judicial proceeding.

In light of the recent changes, it is even more important that a taxpayer take great care in formulating, preparing and submitting an OIC to the IRS.

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