The IRS struggles every year to collect unpaid taxes. Interest and penalties accrue on all tax debts until paid and often penalties and interest can equal two or three times the original tax amount. However, the IRS and Congress soon realized that getting something was better than nothing and that it made sense to forgive tax debt if at least some portion of the tax was recovered. This resulted in the Offer in Compromise program.
The IRS has made great strides in improving the processing of OICs. These efficiencies are making it easier for taxpayers to navigate the OIC process and enable them to receive responses in a timely manner.
When an OIC is submitted, the IRS will verify that it can process the offer. The offer will be processed if the taxpayer has: (1) paid the $150 application fee; (2) filed all back tax returns; (3) is not actively involved in a bankruptcy proceeding; and (4) not been involved in an on-going audit.
Upon submission of the OIC, the IRS must verify that the offer can be processed. The offer goes through a screening process to determine if the taxpayer or taxable entity has: (1) paid the required application fee; (2) ensured that all delinquent tax returns have been filed; (3) not instigated a bankruptcy court proceeding; and (4) not been issued an audit notification.
The taxpayer has a few weeks to respond with the requested items. If the response is not timely, the IRS can return the offer and dismiss the offer if need be. If the offer is returned, the IRS will not refund the processing fee.
The IRS then assesses the taxpayer’s potential for collection. As a result, the agency has the right to accept the IRS offer in compromise as it was submitted originally. They often may send a letter summarizing the collection potential analysis. The taxpayer has the right to respond to the analysis with any documentation necessary or can dispute the IRS findings. The taxpayer also has the right to accept the IRS’ analysis and agree to increase their offer to the amount that is shown in the analysis letter.
The IRS offer in compromise can be rejected outright after review of the analysis is completed. If the taxpayer does not agree with the analysis, they have the right to file an appeal. At this stage, the taxpayer can submit additional documentation (if needed) and make additional arguments in support of their position.
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