In February of 1992 the Internal Revenue Service came out with "New Standards' for acceptance of offers in compromise. The idea of an offer in compromise is for the taxpayer to offer the IRS an amount less than the outstanding liability in exchange for the IRS compromising their tax liability claim. An offer in compromise can be accepted on under two theories: Doubt as to collectability and doubt as to liability.

I. Doubt as to liability. If there's question as to liability of the taxpayer, an offer in compromise can be submitted on that basis. The taxpayer indicates on the offer in compromise form (form 656) that he or she is not responsible for the tax or that the tax is in the wrong amount.. A statement is attached giving a detailed explanation as to why the liability was improperly assessed against the taxpayer.

II. Doubt as to collectability.If the offer in compromise is being submitted because the taxpayer cannot afford to pay the entire liability, the taxpayer provides proof to the IRS of the taxpayer's inability to pay.

III. Required financial information.

A. Form 433 A. Collection information for individuals. Each section o the 433 A must be completed. If information is not applicable then so indicate with 'N/A'. Assets should be listed at a quick sale or liquidation value.Ý Motor vehicle value can be determined with low blue book. Household goods and personal property should be valued at a "garage sale" or "swap meet" valuation. Real property should receive an evaluation by a qualified real estate professional.

1. Monthly income and expense analysis.The most critical part of the 433 A is the monthly income and expense analysis.

a. Line 42 is the national standard expense based on the total amount of monthly income and the number of persons in the household. This number is inalterable. If tax payers actual expenses exceed the national standard expense, the tax payer will only be allowed the national standard expense amount.

b. Housing and Utility expenses are based on a local or area standard. The numbers indicated in the housing and utilities chart is a maximum allowable. The taxpayer is allowed the amount that can actually be proven or the maximum allowable figure, whichever is lower. To exceed the standard, there must be special circumstances which require more expensive utilities or more expensive housing, etc. Some justifications include special physical needs, special health considerations, etc.

c. Line 44, transportation, maximum is indicated by a local standard. Either the actual amount spent or the local standard, whichever is lower, is allowed.

d. Line 45, health care, can include the cost of health insurance, cost of non prescription medication, insurance policy deductible, and other reasonable health care expenses.

e. Line 49, life insurance, must be justified by the tax payers age and ability to get insurance through the IRS. IRS may insist that the policy be canceled if there is cash value or the monthly payment is too high.

f. Line 50, debts that are not legally perfected or secured will be disallowed. Credit card payments, unsecured loan payments, payments to family members are all disallowed. Payments on an automobile are allowed according to the transportation standards in line 44. Other secured obligations that are legally perfected can be allowed if they're reasonable.

g. Line 51, other expenses, is the mystery section. If the tax payer has a child in college, education expenses are allowed to the end of the semester. After the semester is ended, IRS will disallow any education expense for college.

B. 433 B, collection information statement for business.

1. Form 433 B is required for any self employed individual requesting an offer in compromise. As with the 433 A, the 433 B must be accurate and contain a response in each and every blank.

2. Substantiation. All expenses must be verified with independent documentation. Most revenue officers accept the past three to six months of bank statements, utility bills, insurance statements, etc. Other revenue officers require that you additionally provide copies of bank statements and canceled checks.

3. The Processable Offer. If the IRS establishes through the review of the financial statement that the offer is "processable", it will be sent on to the next step and be reviewed by a group manager, branch chief, or both, then to District Counsel (the legal department) to be reviewed for legal accuracy.

IV. The Amount of the Offer

A. The IRS requires that the offer in compromise pay the net realizable equity in all assets plus the net disposable income for five years.

B. The attached worksheets indicate that the IRS takes into consideration all personal and real property wherever located. It's very straightforward to works of the checklist to determine if the amount of your offer is processable. If it is not processable, you always have the opportunity to try once again.

1. Acceptance of offer in compromise requires five years of compliance. My biggest fear is that I'll get an offer in compromise accepted, have the client file and pay taxes for four years, and then before the end of the fifth year, fail to make and estimated tax payment, pay his tax liability in full on April 15, or file a tax return late. Since the offer in compromise is a contract with the IRS, they're serious about making sure that the tax payer remains in compliance during the entire five year period. It is possible to revoke an offer and reinstate all the tax interest and penalties due anytime before the five years of acceptance of the offer. This could be done due to the tax payer's failure to comply to the conditions indicated in the offer in compromise disclosure statement.

IV. Possibility of Acceptance. Swing of the pendulum. Right now the IRS pendulum is swinging towards rejection of offers in compromise. They have tightened up on their collection procedures and have begun seizing more small personal property and assets with minimal value.

V. Waiver of statued limitations and collections. By submitting an offer in compromise, and having it received as processable, it causes the ten year collection statue to be suspended for the time the offer in compromise is in existence plus an additional 12 months should the offer be denied. Offer in compromise also suspends the 240 day assessment waiting period required to discharge taxes in a chapter 7 bankruptcy period.

VI. Considerations. When submitting an offer in compromise, you must consider what other options are available. In my opinion, you need to make an initial analysis as to whether or not the taxes could be discharged into bankruptcy or handled in a manner other than offer in compromise. You must make absolutely certain that at the time the offer is filed, it will not interfere with other possible options. Of course, this determination depends on the speed with which the offer in compromise needs to be submitted. Sometimes it is better to establish an installment agreement for a few months while exploring and analyzing other options.

 About Gary A. Quackenbush and GQ LawFlyer about GQ LawIRS and Tax InformationOther Services and Articles





























































Back to Top

Back to GQ Law