Revamped Offer-In-Compromise Program Often Requires 20 Percent Up-Front Payment

Under a new federal law, taxpayer submitting new offers in compromise (OIC) in many cases must make a 20 percent nonrefundable, up-front payment, according to the Internal Revenue Service (IRS). An offer in compromise is an agreement between the taxpayer and the IRS resolving the taxpayer’s tax debt. In certain circumstances, the IRS has the authority to settle federal tax liabilities by accepting less than full payment.

The recently enacted Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) made major changes to the OIC program, tightening the rules for lump-sum offers and periodic-payment offers. These changes became effective beginning Sunday, July 16, for all offers received by the IRS.

Under the new law, taxpayers requesting lump-sum OICs must include a payment equal to 20 percent of the offer amount. The payment is nonrefundable, that is, it will not be returned if the OIC request is later rejected. A lump-sum OIC means any offer of payments made in five or fewer installments.

Taxpayers requesting periodic payment OICs must include the first installment payment with their application. A periodic payment OIC is any offer of payments made in six or more installments. The taxpayer is required to pay additional installments while the offer is being evaluated by the IRS. All installment payments are nonrefundable.

Under the new law, taxpayers qualifying as low-income or filing an offer based solely on doubt as to liability qualify for a waiver of the new partial payment requirements.

If the IRS cannot make a determination on an OIC within two years, then the offer will be deemed accepted. If a liability included in the offer amount is disputed in any court proceeding, that time period is omitted from calculating the two-year timeframe.

OIC requests are submitted using Form 656, Offer in Compromise, a new revised form should be available online within a few weeks. The form provides detailed instructions for completing an offer and includes all the necessary financial forms. When submitting form 656, taxpayers must include an application fee of $150, unless they qualify for the low-income exemption or are filing a doubt-as-to-liability offer. Complete information on the entire collection process and the OIC program are available on the IRS.gov site.

Further details on the TIPRA changes can be found in Notice 2006-68, available on the IRS web site and scheduled to be published in the Internal Revenue Bulletin 206-31, dated July 31, 2006.

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