The IRS Can Make Offers in CompromiseIRC Section
7122 authorizes the Internal Revenue Service to compromise
any civil or criminal case arising under the internal revenue laws
unless it has been referred to the Department of Justice for
prosecution or defense. The Internal Revenue Service may
compromise any tax controversy when there is doubt as to tax
liability or collectibility. Compromise results in
taxpayer paying less than asserted liability and closes taxpayer's
entire tax liability for covered period. A compromise may be set
aside in limited circumstances.
What is an Offer in CompromiseA compromise is a
particular type of settlement of a tax controversy.
Compromises usually take place at the collection stage. They are
agreements between the Internal Revenue Service and a taxpayer
allowing the taxpayer to pay the government less in taxes than the
asserted tax liability. Compromises are governed by the rules
applicable to contracts.
Grounds for an Offer in CompromiseThe Internal Revenue
Service has complete discretion whether to enter into a
compromise, and will entertain an offer in compromise only if it
is based on one or both of the following grounds:
Most compromises allow a taxpayer to
pay the government less in taxes than owed, and are
based on the taxpayer's inability to pay the admitted
tax liability (including penalties and interest).
- doubt as to the taxpayer's
liability for the tax
- doubt as to the collectibility
of the tax. .
Covers All Tax MattersA compromise is generally not
limited to one issue or transaction. Rather, a compromise is
deemed to close the taxpayer's entire tax liability for the period
covered, including liability for taxes, penalties, and interest.
Thus, compromise as to part of a tax liability (a penalty, for
example) may have the result of foreclosing the right to dispute
other parts of the tax liability.
Procedure for an Offer in CompromiseAn offer to enter
into a compromise agreement is called an Offer in
Compromise. Offers generally are made by the taxpayer and
must be made on Form
656. In addition to the form, a written position
statement is usually included to bolster the taxpayer's arguments.
As part of the offer in compromise, taxpayers are required to
waive the benefit of the statute of limitations on assessment or
collection of the tax, thereby affording the Internal Revenue
Service time to review the offer. This gives the IRS more time to
collect the taxes if the Offer is rejected. Remittance of the
amount offered in the proposed compromise, or a deposit if the
offer is to pay in installments, must also accompany the offer.
Form 433A/433B - For offers based on inability to pay,
taxpayers must submit a statement of financial condition (Form 433A -
individuals or Form 433B - businesses) to enable the
Internal Revenue Service to analyze the taxpayer's ability to pay.
The Internal Revenue Service will require that the amount offered
reflect the maximum amount collectible from the taxpayer's current
income and assets, and may also require, as additional
consideration for entering the agreement, that the taxpayer
execute one or more collateral agreements to secure additional
payment from his future income or to provide that the taxpayer
forgo certain other tax benefits.
Enforceability of a CompromiseAfter an offer is accepted
by the Internal Revenue Service official who has been delegated
the authority to do so, the agreement is binding and is
enforceable as a contract, according to its terms. Neither party
may reopen a compromised case. The only grounds upon which a
compromise can be set aside are:
A requirement of an accepted compromise is that the
taxpayer timely file and timely pay all required tax
returns for a period of 5 years. If the taxpayer files late
or pays late, the IRS can void the compromise agreement.
- mutual mistake of fact as to the agreement
- falsification or concealment of assets by the
- grounds sufficient to set aside a contract generally.