The IRS offers several programs to taxpayers with past-due federal income tax liabilities. The purpose of these various programs is to offer different ways for taxpayers to resolve their tax liabilities based on their unique financial situation. Perhaps the best known of these programs is the Offer in Compromise (“OIC”). The OIC is one of the most popular tax resolution programs offered by the IRS. Because of the large number of OIC’s received annually, the IRS has taken actions to streamline the OIC process as much as possible.
The first major step was to consolidate most OIC processing operations in two locations, or Centralized Offer in Compromise Units. The next major action was to consolidate and standardize the OIC process. When you submit an OIC, the IRS will first verify that the offer is “processable.” In order for an OIC be processable, the following conditions must be met:
- The taxpayer making the application must have filed all past-due tax returns;
- The taxpayer cannot be actively involved in a bankruptcy proceeding; and,
- The taxpayer must have included a processing fee, or completed and qualified for a hardship waiver of the processing fee;
- The taxpayer must have included the initial payment, or completed and qualified for a hardship waiver of the initial payment fee; and,
- The taxpayer cannot be actively involved with an audit.
- If the offer is not processable, it will be returned without further consideration. If the fee was submitted with the OIC, it will be returned.
The next stage is referred to as offer verification. During verification, the IRS will examine the financial information the taxpayer provided in their OIC application. They will also look at any supporting documentation provided with the OIC. If they determine that they need additional documentation to support claims of income, expenses or equity on the application, they will send the taxpayer an Offer Verification Letter. This letter will request the specific, necessary documentation. The IRS will normally give the taxpayer several weeks to provide this information. If all of the information is not provided, or if it is not sent timely, the IRS may return the offer without further consideration. If the offer is returned at this stage, the processing fee will not be refunded.
In the next stage, the IRS will perform the actual substantive analysis of the taxpayer’s financial information. They will look at all of the information provided to determine the taxpayer’s reasonable collection potential. As a result of this analysis, several things could occur. The IRS may accept the OIC as originally submitted. They could also send a letter containing a summary of the collection potential analysis. The taxpayer is then allowed to respond to the analysis with documentation or arguments disputing the IRS analysis. The taxpayer may also accept the analysis and agree to increase their offer to the amount indicated in the analysis letter.
The IRS also has the ability to reject the offer when the original analysis is completed. If this occurs, and the taxpayer does not agree with the IRS analysis, the only option is to file an appeal. At the appeals stage, the taxpayer is given the opportunity to submit additional documentation and arguments in support of their offer.