Tax & Business Insights

IRS Offers in Compromise = Frustration (Part I)

Volume 17 Issue 2 --  March/April 2005

For an update on new 2006 Rules for Offers in Compromise, CLICK HERE. This article does not reflect the 2006 Legislation on Offers in Compromise.

IRS handling of Offers in Compromise (“OIC” or “Offer”) has been making news lately. The Senate Finance Committee has been investigating the way the IRS responds to Offers, and despite a 1998 law intended to encourage the IRS to be more flexible in accepting Offers, many believe that the IRS is still too rigid and too inclined to reject legitimate Offers.

This newsletter will examine some of the practical situations tax professionals face when submitting an Offer in Compromise for a client. In this instance, we will refer to a hypothetical client named Fred Strated (“F. Strated”) who lives in Virginia . We will attempt to address some common problems with OICs in a series of newsletters.  There are many situations where an OIC is the preferred (or only) course of action.

Let’s assume F. Strated is currently paying the IRS $2,000 per month but he cannot continue to do so, and he is about to default on his IRS installment agreement (“IA”).  The official position of the IRS is that if you are paying in installments and you submit an OIC, you should continue to make your installment payments.

Taxpayers like F. Strated, who are about to default on their IA (because they agreed to IAs that were beyond their means), are plentiful.  While the IRS usually states that it would never commit one to payments beyond their means, such situations are common. 

When it is probably necessary to have F. Strated default on the IA, the thing to do is to inform the IRS (by certified letter) prior to the default that a default will occur and why — namely, because F. Strated cannot continue with the payments.  Also inform the IRS that an OIC will be submitted. 

Revenue Officer Grabit

Suppose that the IRS collection agent assigned to F. Strated’s case is Revenue Officer “R/O” Grabit. Sometimes Grabit may even suggest the filing of an OIC.

Many taxpayers and practitioners believe that Grabit will be the person handling the OIC.  Not so; all Offers must now go to one of two Service Centers.  Offers submitted in the eastern part of the U.S. (such as F. Strated’s) must first be sent to the Brookhaven Service Center, in Holtsville, NY. Even if Grabit receives the OIC first, Grabit will send it to Holtsville.  If there is an R/O on the scene, it is always advisable to inform him or her that an OIC will be submitted and send the R/O a copy of it, if requested. 

Assuming F. Strated and his advisor decide to proceed with an OIC, the next step is assembling the documentation and submitting it to the IRS.  There are three broad reasons for submitting Offers: (1) doubt as to collectibility (can’t pay in a reasonable period of time), (2) doubt as to liability (don’t owe the IRS any or all of the tax assessed) and (3) effective administration of tax laws. 

Apparently because all OICs submitted east of the Mississippi River have to go to the Service Center in Holtsville, NY, there is a log jam, and the wait to hear from the Service Center may be a year or more. 

The IRS imposes two hurdles on OICs. First, the Offer must be “accepted for processing.” Only after it is accepted for processing will it actually be reviewed.

An Exercise in “Lint Picking?”

In determining whether an OIC will be accepted for processing, there appears to be an extensive exercise in “lint picking.”  Imagine, if you will, being kicked out of first grade because you wrote the letter “b” backwards and confused it with the letter “d.”  It often seems as if there is a body of troops in the Holtsville Service Center whose mission in life is to reject OICs for processing. Such rejections mean that the OIC is not even considered and when it is sent back, the taxpayer then has to go to the end of a very long line, if another or corrected OIC is to be submitted.

To some practitioners, it seems to be an unwritten rule in the IRS that the quickest way to get rid of an OIC is to reject it for processing.  IRS processors often seem to look for any means by which to reject an OIC, no matter how slight or trivial. 

While it is somewhat comforting that the IRS has a written policy saying that they will not use enforced collection actions while an OIC is pending, that does not assuage the frustration of F. Strated in having to wait over a year to hear from Holtsville, NY.

In the next issue, we will look further into the mechanics of preparing and submitting an Offer and consider some of the problems that typically arise during the Offer process.

For an update on new 2006 Rules for Offers in Compromise, CLICK HERE.

Copyright 2005
By Tax and Business Professionals, Inc.
9837 Business Way
Manassas, VA 20110
(800) 553-6613

While designed to be accurate, this publication is not intended to constitute the rendering of legal, accounting, or other professional services or to serve as a substitute for such services.

Redistribution or other commercial use of the material contained in Tax & Business Insights is expressly prohibited without the written permission of Tax and Business Professionals, Inc.