The IRS Can
Make Offers in Compromise
authorizes the Internal Revenue Service to compromise any civil or
criminal case arising under the internal revenue laws unless
been referred to the Department of Justice for prosecution or defense.
The Internal Revenue Service may compromise any tax controversy when
there is doubt
as to tax liability or collectibility,
or it is in the best
interests of the government.
results in taxpayer paying less than asserted liability and closes
taxpayer's entire tax liability for covered period. A compromise may be
set aside in limited circumstances.
What is an
Offer in Compromise
compromise is a
particular type of
settlement of a tax controversy.
take place at the collection stage. They are agreements between the
Internal Revenue Service and a taxpayer allowing the taxpayer to pay
the government less in taxes than the asserted tax liability.
Compromises are governed by the rules applicable to contracts.
an Offer in Compromise
Service has complete discretion whether to enter into a compromise, and
will entertain an offer in compromise only if it is based on one or
both of the following grounds:
- doubt as
to the taxpayer's liability for
- doubt as
to the collectibility of the
- if it is
in the "best
interests" of the government.
Most compromises allow a taxpayer to pay the government less in taxes
than owed, and are based on the taxpayer's inability to pay the
admitted tax liability (including penalties and interest).
generally not limited to one issue or transaction. Rather, 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
for an Offer in Compromise
Form 656 - The
offer to enter
into a compromise agreement is called an Offer in Compromise. Offers
generally are made by the taxpayer and must be made on Form 656 This
serves as the "cover page" for the
position statement and supporting documents usually included
to bolster the taxpayer's arguments.
Statute of Limitations
part of the offer
compromise, taxpayers are required to waive
benefit of the statute
of limitations on assessment or collection of the tax,
affording the Internal Revenue Service time to review the offer. This
gives the IRS more time to collect the taxes if the Offer is
waiver is effective during the time the Offer in Compromise is pending
plus one year. This is a significant deterrent to submitting an Offer
Compromise especially when the tax is older and the statute of
limitations on collections may expire within the next year or two.
amount offered in the proposed compromise, or a non-refundable deposit
of 20% must accompany the
offer. This non-refundable deposit requirement makes many offers
For offers based on
inability to pay, taxpayers must
submit a statement of financial condition (Form 433A - individuals or
Form 433B - businesses) to enable the Internal Revenue Service to
analyze the taxpayer's ability to pay. The Internal Revenue Service
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 for entering the agreement, that
the taxpayer execute one or more collateral agreements to secure
additional payment from his future income or to provide that the
taxpayer forgo certain other tax benefits.
433A asks if the taxpayer made any transfers within the past 10 years
for less than the Fair Market Value. If the IRS determinesa the
taxpayer dissipated assets, the IRS will include the value of
the assets as subjec to the Offer.
of a Compromise
an offer is
accepted by the Internal Revenue Service official who has been
delegated the authority to do so, 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:
1. mutual mistake of fact as to the agreement
2. falsification or concealment of assets by the
3. grounds sufficient to set aside a contract
requirement of an accepted compromise is that the taxpayer timely
file and timely pay all required tax returns for a period of 5 years.
If the taxpayer files late or pays late, the IRS can void the