In a previous post, we discussed the basics of the Offer in Compromise (abbreviated as Offer or “OIC”) program as a resolution for a taxpayer’s tax liability. These included information about how to qualify for an Offer, the forms needed (which are found in the Offer in Compromise booklet), the application fee, and the different payment options offered by the Internal Revenue Service (IRS). We also discussed how to determine the amount of the initial payment that must be submitted with the Offer, based on the payment terms under which the Offer is submitted, and what additional payments need to made during the Offer’s review and/or after the Offer is accepted.
There are three different reasons under which the IRS allows Offers to be submitted: Doubt as to Collectibility, Effective Tax Administration, and Doubt as to Liability. Today, we’re going to look at the first of these three in more detail.
Doubt as to Collectibility, abbreviated DOC, is the Offer type seen most often. In simplest terms, an Offer submitted under DOC criteria says to the IRS, “I can’t afford to pay all the taxes I owe. Even if I mortgage myself and my entire life – down to my shorts – I won’t ever be able to pay off my tax liabilities. Instead, please accept a payment for this calculated amount, wipe out the rest of my taxes, and let me start over on my obligations as a taxpayer.”
Calculations for the amount that can be proposed for a DOC OIC initially include:
- The value of all bank accounts (less $1,000.00) and whole life insurance policies (minus any loans)
- A discounted value for all retirement accounts, investment accounts, and stocks/bonds
- A discounted value for the equity in any properties and/or vehicles
- The taxpayer’s “future income,” which is defined as monthly income minus monthly expenses, multiplied by either 12 months (for a Lump Sum Cash Offer) or 24 months (for a Periodic Payment Offer)
There is also a variant on the DOC Offer where the taxpayer asks the IRS to consider special circumstances that they’re facing. To use this option, the taxpayer must not be able to be able to pay off their taxes (like a regular DOC Offer) but they also must have one or more assets or accounts that have a value. Normally, some amount of that value would be included in the calculation. Under special circumstances, the taxpayer presents a compelling reason that the IRS should reduce or remove the items’ value from consideration in the Offer analysis, while still including the value of all other assets.
Here’s an example of when special circumstances might be used. Let’s say there is a retired, unmarried 65-year-old taxpayer on a fixed income who owes $100,000.00 to the IRS. This person has an investment account worth exactly $50,400.00 that’s intended to last them through retirement. Their financial analysis shows that the taxpayer’s monthly income minus their monthly expenses has them in the hole by $200.00 a month. This means that to continue to meet their ordinary and necessary monthly expenses, they need to supplement their income by this amount each month. They had planned to use the funds in the investment account to do that. One might say that they planned well for retirement, if it weren’t for their tax liability.
Believe it or not, the IRS has a life expectancy table that projects, based on a person’s current age, how much longer they will live. A 65-year-old taxpayer is expected to live for another 21 years, or 252 months. It would take $50,400.00 to cover the $200.00 monthly deficit discussed above over this person’s remaining lifespan, but this is the exact amount they have in the investment account. In this scenario, if the IRS were to force this taxpayer to liquidate the investment account and pay those funds toward an Offer, they would be creating a hardship for them. Since the IRS is not allowed to create a hardship, it is reasonable to present this situation in the Offer packet, exclude the value of the investment account from the calculation, and propose a settlement based on other equity and/or assets that person may have.
Once a DOC Offer is assigned to an Offer Examiner (OE) for review (typically at least 5 months from the date the IRS receives the OIC), it is that person’s job to review the calculations. They look to ensure that the information presented in the Offer packet is accurate and determine if the proposed settlement amount is really the most the government can expect to be repaid. During this investigational period, the OE checks the information submitted against government databases. They cross-check income shown in the Offer against the IRS’ records of the taxpayer’s earnings and compare both of those things to information reported on the most recently filed tax return. They also usually find any assets that weren’t disclosed in the submitted Offer, whether they were left out on purpose or by accident.
When the initial investigation is complete, the OE next reaches out to the taxpayer (or their representative) to discuss their findings. Any discrepancies that the OE found are addressed at this point and the taxpayer is given the opportunity to respond. If the OE’s analysis shows that the taxpayer does qualify for an Offer but can afford more than the amount they proposed in their Offer, the OE presents the IRS’s calculation and allows the taxpayer to increase their settlement amount to match. Special circumstances may need to be discussed extensively at this point as well. Depending on what additional information is needed, these negotiations can take several months.
If the Offer amount is increased, the taxpayer may also need to make an additional payment to either increase the 20 percent down payment (Lump Sum Cash Offer) or catch up on the increased monthly payments (Periodic Payment Offer) that should have been made if the higher amount was originally offered. Assuming all issues have been addressed and an appropriate settlement amount has been approved by all parties, the Offer would then be forwarded for approval. Under normal circumstances not involving a pandemic, this takes anywhere from 30 to 60 days.
If the OE and the taxpayer cannot reach an agreement, the IRS rejects the Offer, at which point the taxpayer has 30 days to request an appeal. The issues that the OE and the taxpayer could not agree on can be taken up with the assigned Appeals Officer, who would then evaluate these items with a fresh pair of eyes. Any decision made by the Appeals Officer is final.
If the rejection is sustained at the Appeals level, the account will still need to be resolved through Collections. The taxpayer may want to request placement into Currently Non-Collectible status (if their financial analysis shows a hardship) or set up an Installment Agreement (payment plan) for making monthly tax payments.