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Offer in Compromise: Settlement of IRS Tax Liabilities
Acceptance of an offer in compromise by the IRS results in a taxpayer paying
less than the full amount of the asserted liability and closes the taxpayer's
entire tax liability for the covered period. Compromises are governed by the
rules applicable to contracts.
Internal Revenue Code ("IRC") Section 7122 authorizes
the Internal Revenue Service to compromise any civil or criminal case arising
under the Internal Revenue laws, unless the matter has been referred to the
Department of Justice for prosecution or defense.
The IRS has complete discretion whether to enter into a compromise and will
generally entertain an offer in compromise only if it is based on one or all of
the following grounds:
doubt as to the taxpayer's liability for the tax;
doubt as to the ability of IRS to collect the tax due to the taxpayers current
and anticipated future financial circumstances; and
a determination that collection of the tax would cause an undue hardship on the
Because a compromise is generally not limited to one issue or transaction, a
compromise is deemed to close the taxpayer's entire tax liability for the period
covered, including liability for taxes, penalties, and interest. Thus,
compromise as to part of a tax liability (a penalty, for example) may have the
result of foreclosing the right to dispute other parts of the tax liability
Procedure. An offer to enter into a compromise agreement is submitted on a Form
656. In addition to the form, a written position statement is usually included
to bolster the taxpayer's arguments. As part of the offer in compromise,
taxpayers are required to waive the benefit of the statute of limitations on
assessment or collection of the tax, thereby affording the IRS time to review
the offer. Generally, it is an advisable to submit a deposit or the amount
offered along with the offer. If the offer is not accepted, IRS must return the
amount deposited or sent with the offer.
For offers based on inability to pay, taxpayers must submit a statement of
financial condition (Form 433A - individuals or Form 433B - businesses) to
enable IRS to analyze the taxpayer's ability to pay. IRS will require that the
amount offered reflect the maximum amount collectible from the taxpayer's
current income and assets, and may also require, as additional consideration,
that the taxpayer enter into a collateral agreement to secure additional payment
from the taxpayer's future income or to provide that the taxpayer forgo certain
other tax benefits.
After an offer is accepted by IRS, the agreement is binding and is enforceable
as a contract, according to its terms. Neither party may reopen a compromised
case. The only grounds upon which a compromise can be set aside are: (a) mutual
mistake of fact as to the agreement; falsification or concealment of assets by
the taxpayer; or (b) grounds sufficient to set aside a contract generally.
An additional requirement of an accepted compromise is that the taxpayer timely
file and timely pay all required tax returns for a period of five years after
the compromise is entered into. If the taxpayer files late or pays late, the IRS
can void the compromise agreement.
Although there are certainly limitations on the ability of a taxpayer to reach
an acceptable offer in compromise with IRS, this opportunity to settle tax
claims by payment of less than the full amount due can be extremely beneficial
in the right circumstances.