In our previous posts about the Offer program, we first discussed the basics of the Offer in Compromise (abbreviated as Offer or “OIC”) program as a resolution for a taxpayer’s tax debt. These included information on how a taxpayer can qualify for an Offer, the forms that need to be completed and submitted with a standard OIC (found in the Offer in Compromise booklet), the application fee, and the different payment options offered by the Internal Revenue Service (IRS).
We later reviewed how to calculate both the Offer amount and the amount of the initial payment that must be submitted with the Offer, based on the payment terms under which the Offer is submitted. We explained what additional payments need to be made during the Offer’s review and/or after the Offer is accepted. We also went into greater detail about the criteria for Doubt as to Collectibility Offers (abbreviated DOC).
The next type of OIC we’ll look at is the one submitted under Effective Tax Administration (ETA) criteria. In an ETA Offer, the taxpayer must have the ability to pay the debt in full through equity, assets, and/or future income, but have a very real reason to not include the value of one or more of these items in the calculation.
The canonical example goes something like this: “I own my home outright and would be able to pay all of my tax debt if I sold the house, but I’m disabled and the house is greatly modified so I can be self-sufficient. If I sell my home to pay my taxes, I won’t be able to afford to buy a new house and/or modify it to suit my needs, so I’ll also have to pay someone to take care of me. Since I can’t afford that additional expense, I ask that you remove the equity in my home from the Offer calculation and settle out for the value of my other assets and future income instead.”
This is very similar to the DOC Offer with special circumstances covered in our last post. The only difference between these two sets of Offer criteria is that in an ETA Offer, the taxpayer must be able to pay the taxes in full (if it weren’t for their compelling reason), whereas in a DOC Offer with special circumstances, the taxpayer would still not be able to pay the full amount of tax even if the IRS ignored the extenuating situation presented.
In both of these situations, the taxpayer should provide documentation supporting their written explanation. In the house example above, the taxpayer would most likely need to present medical records concerning both their disability and the accommodations they need, as well as photos of the physical modifications present in their home. They may even need to go as far as getting a quote for the cost of having those same modifications installed so as to prove that they wouldn’t be able to afford it again in the new home (if that were the case) and/or pricing out another home of the right size to prove it wouldn’t be affordable.
During the Offer review, the Offer Examiner (OE) will most likely request additional information regarding the taxpayer’s situation. They may ask for more or different types of documents to verify the claim. Once an ETA Offer is accepted, the taxpayer must pay off the remaining amount per the Offer’s terms: Either the remaining 80 percent of the Offer amount would be due within the next five months (as 20 percent would have had to be paid as a down payment for the Lump Sum Cash Offer), or the taxpayer would have to complete their regular monthly payments of the Offer amount over a total of 24 months from the date of submission (under a Periodic Payment Offer).
The last OIC type, and the one seen least often, is Doubt as to Liability (DOL). In this situation, the taxpayer states that their total liability amount is wrong and presents a written explanation with documents proving their position. They then propose what the right amount of tax should be (which must be $1.00 or more) and request to make payments toward the correct tax liabilities.
As an example, this has worked in a situation when a taxpayer was fully, medically incapacitated for an extended period of time. During this time, their authorized personal Power of Attorney (POA) withdrew a large chunk of money from the taxpayer’s investment account and used the funds to purchase a house only for the POA’s own benefit (not the taxpayer’s). The POA later sold the property and pocketed the proceeds. Again, the taxpayer didn’t receive anything for the value of their investment; however, the taxpayer was still taxed on the funds drawn from the account. Through the DOL Offer process, the taxpayer’s new representative was able to prove that the taxpayer never received the funds, and therefore should not be required to pay the tax assessed on this liquidation. Accordingly, the IRS agreed to adjust the tax due.
This type of OIC has a different application form altogether. This can be found online here. No payments are required with the submission of a DOL OIC. In contrast to the other two types of Offer, though, the taxpayer is required to pay the amount of the approved Offer within only 90 days from the date of the OIC’s formal approval. For all types of Offers, all liens would be released within 30 days after the Offer amount is paid in full.
It is only recommended that the taxpayer submit a DOL Offer if they weren’t able to dispute the amount of tax shown on their account during the statutory time allowed. If they have other options for getting the tax corrected, like amending returns or filing a petition in Tax Court, it is recommended that the taxpayer try those options first before moving forward with a DOL OIC.
As with the DOC Offer, if the OE and the taxpayer can’t reach an agreement in either the ETA or the DOL Offer, the IRS rejects the Offer. From the date of the rejection letter, the taxpayer has 30 days in which they can request an appeal. If they go this route, an Appeals Officer (AO) will be assigned to review the case. The taxpayer can then review any issues that they and the OE could not agree on with the AO. This person would then evaluate these items from an unbiased position. They may request additional documents and information, depending on what they see. 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 set up a payment plan (Installment Agreement) for making monthly tax payments or request placement into Currently Non-Collectible status (if their financial analysis shows a hardship).