New Guidance on Offers in Compromise

The IRS recently issued new guidance on Offers in Compromise (OIC), continuing a trend of liberalizing rules for compromise of outstanding tax obligations. The new rules allow more discounts of asset values and in turn leads to the ability to compromise a liability for less than in the past. The IRS last made significant changes to its offer program in 2012 and that has resulted in a dramatic increase in the acceptance rate. The acceptance figures for the last 2 years are:

Offers in compromise (thousands) [5]:20122013

Number of offers received64,00074,000

Number of offers accepted24,00031,000

Percentage Accepted38%42%

The recent rates are a dramatic improvement over the rates for the prior decade where less than 25% were accepted. The most recent changes were described in an April 16, 2014 posting on the IRS website. The IRS has issued new Form 656 Booklet, a revised offer in compromise Form 656 and a revised financial statement, Form 433A OIC. An offer in compromise is an agreement between a taxpayer and the Internal Revenue Service that settles the taxpayer’s tax liabilities for less than the full amount owed. If the liabilities can be fully paid through an installment agreement or other means, the taxpayer will in most cases not be eligible for an OIC. Generally the IRS will not compromise for less than the aggregate value of a taxpayer’s assets plus some amount to account for the taxpayer’s future earnings potential. The most recent changes allow taxpayers greater discounts on their assets from market value than prior rules. For example, rules in existence prior to recent changes for a taxpayer’s investment account with a value of $100,000 would have required the taxpayer to fully account for that amount in her offer. Under the current rules the taxpayer could discount the value of that account by 20% thereby reaching a valuation of $80,000. The IRS utilizes the concept of discounting by 20% for almost all taxpayer assets. In the past the IRS only used this discount for tangible assets like real estate and vehicles. The current policy however has expanded that concept to intangible assets. The new rules combined with the 2012 changes should result in even higher acceptance rates going forward.The changed policies indicate recognition by the Service that many taxpayers with large tax obligations may never gain the ability to pay those obligations and it is in the interest of the IRS and the taxpayer to reach a reasonable settlement of tax obligations that provides a prompt partial recovery for the government.