Offer in Compromise or OIC is an agreement between a taxpayer and the Internal Revenue Service (IRS) which may allow a taxpayer to make an “offer” to the IRS and if the IRS accepts the offer, the taxpayer’s outstanding federal tax debt may be settled. The IRS will only accept an Offer in Compromise if they believe the federal tax debt can not be paid in one lump sum payment or with an installment agreement.
Currently the IRS denies approximately 80% of first time OIC offers, but they may be willing to accept a Massachusetts taxpayers offer if it will help the taxpayer pay their taxes in the future. Massachusetts taxpayers who do not pay their federal taxes may become the target of aggressive collection actions by the IRS which can include: wage garnishment, bank account levies and personal or business property repossessions.
Offer in Compromise is not for everyone. It can be costly, time consuming, and difficult to implement. Massachusetts taxpayers who need more information on IRS tax settlement options should can a tax professional.
Three types of Offer in Compromises:
1. Doubt as to Collectibility – If the Internal Revenue Service does not think a Massachusetts taxpayer can pay all of their federal tax debt before the statutory time for collecting the tax expires they may accept an Offer in Compromise.
2. Doubt as to Liability- If the IRS believes the amount of debt may be incorrect they may accept an Offer in Compromise. Errors in calculation are very rare, but they could occur if an IRS examiner made a mistake in interpreting tax law or did not consider all the taxpayer’s tax evidence.
3. Effective Tax Administration- Under this condition the amount of tax debt is not in question and the IRS may be able to collect the IRS debt but the collection of the tax debt may cause an economic hardship for the Massachusetts taxpayer that could be inequitable or unfair. If this is the case, the IRS may accept an Offer in Compromise.
Rejection of Offer in Compromise in Massachusetts
The IRS will reject most Offer in Compromise offers. Massachusetts taxpayers may appeal the decision, but the IRS makes the final decision. If all negotiations or appeals fail, the taxpayer will not have any legal recourse against the IRS.
If the Internal Revenue Service denies the OIC offer they are required to send written notification to the Massachusetts taxpayer outlining the reason for the denial. Most OIC offers are denied because the IRS considers them too low. The IRS may be willing to negotiate until an offer can be reached which is agreeable to both the federal government and the Massachusetts taxpayer. All information which is not provided by the IRS can be requested under the Freedom of Information Act.
Appealing an Offer in Compromise in Massachusetts
Offer in Compromise negotiations can usually begin by contacting the IRS administrator who reviewed the initial Offer in Compromise application. A more formal appeal can be done by writing a letter to the IRS within 30 days of the Offer in Compromise denial letter. The following information should be included in the formal appeal letter.
- Massachusetts taxpayers must supply their Social Security number, telephone number, name and address
- A statement from the Massachusetts taxpayer that they are appealing the IRS ruling to the Appeal’s office.
- A copy of the letter sent to the Massachusetts taxpayer and all of their proposed changes or items that the taxpayer wants changed. The Massachusetts taxpayer should also list what they do not agree with and the reason why.
- The taxpayer must document the tax periods or years in question.
- The Massachusetts taxpayer must identify any federal tax laws or other authorities which may support their position.
- The Massachusetts taxpayer must identify any facts that may support their position.
- The letter must be signed under penalty of perjury.
It is possible for Massachusetts taxpayers to represent themselves through the Offer in Compromise appeal’s process. If the taxpayer chooses to seek legal representation they must hire a tax professional such as a tax attorney, enrolled tax agent or certified public accountant.
Completing an Offer in Compromise
The following tasks must be completed by the Massachusetts taxpayer:
- Massachusetts taxpayers must complete all Offer in Compromise forms and send them to the IRS.
- Massachusetts taxpayers must send all requested personal and financial information to the Internal Revenue Service. Information may include: a taxpayer’s pay stubs, banking and vehicle information.
- Massachusetts taxpayers must submit all federal tax returns to the Internal Revenue Service on or before the tax deadline for the next 5 years.
- Massachusetts taxpayers who are self-employed must pay their estimated IRS taxes and submit their tax returns every quarter.
- All federal tax payments (except the amount outlined in the Offer in Compromise agreement) must be paid by Massachusetts taxpayers for the next 5 years.
- Massachusetts taxpayers must pay all tax payments required by the Offer in Compromise agreement.
- The IRS will apply tax refunds to the Massachusetts taxpayer’s federal tax debt for the calendar year that the Offer in Compromise is approved.
If Massachusetts taxpayers fail to meet the Offer in Compromise requirements, the IRS has the legal authority to cancel the agreement and reinstate the full amount of tax debt.
Offer in Compromise Forms
- IRS Form 656- Offer in Compromise. Massachusetts taxpayers must submit IRS Form 656 to the IRS to provide information about the taxpayer and their ability to pay their tax debt.
- IRS Form 443 A- Collection Information Statement for Wage Earners and Self-Employed Individuals. The Massachusetts taxpayer must submit this form to provide more information to the IRS about their ability to pay their IRS tax debt.
- IRS Form 443-B- Collection Information Statement for Businesses. IRS Form 433-B must be sent to the IRS if the Massachusetts business debt is going to be part of the Offer in Compromise.
- IRS Form 656-A- Income Certification for Offer in Compromise Application Fee and Payment. IRS Form 565-A will only need to be completed and submitted if the Massachusetts taxpayer is requesting an OIC fee waiver.