New Law Mandates “Pay to Play” Offer-in-Compromise Rules
by Eric L. Pruitt
Baker, Donelson, Bearman, Caldwell & Berkowitz, P.C.; Birmingham, Ala.
The Internal Revenue Service (IRS) offer-in-compromise program has changed significantly following the July 16, 2006 effective date of certain provisions in the Tax Increase Prevention and Reconciliation Act of 2005 (TIRPA). Under §7122 of the Internal Revenue Code (IRC), the IRS can settle or compromise federal tax liabilities with taxpayers in certain situations. An agreement between the taxpayer and the IRS that resolves the taxpayer’s federal tax liability for less than the full amount due is an offer in compromise. TIRPA added a new sub section (c) to IRC §7122 that sets forth the rules taxpayers must now follow in submitting offers to the IRS to resolve tax disputes.
Internal Revenue Code §7122(c)(1) provides for two types of offers in compromise – lump-sum offers and periodic-payment offers. A lump-sum offer is an offer to pay the compromise amount in five or fewer installments. IRC §7122(c)(1)(A)(ii). An offer to pay the compromise amount in six or more installments is a periodic-payment offer. See IRC §7122(c)(1)(B).
A taxpayer can request an offer in compromise by completing IRS Form 656. After July 16, 2006, a taxpayer is required to submit a payment equal to 20 percent of the offer amount simultaneously with any lump-sum offer in compromise. IRC §7122(c)(1)(A)(i). The new law requires taxpayers submitting periodic payment offers in compromise to include the first proposed installment payment with the offer application (IRC §7122(c)(1)(B)(i)) and to continue making periodic payments while the IRS considers the offer (IRC §7122(c)(1)(B)(ii)). The payments required for both the lump-sum offer and periodic-payment offer are nonrefundable and will not be returned if the offer-in-compromise application is rejected by the IRS. IRC §7809(b).
The new rules requiring partial payment with the offer in compromise may be waived for low-income taxpayers. See IRC §7122(c)(2) and (d).
Finally, in what has been viewed as the “taxpayer friendly” aspect of TIRPA, any offer in compromise that has not been rejected by the IRS within 24 months of its submission will be deemed accepted. IRC §7122(f).
Dennis D. Bean of Dennis Bean & Co. in Fresno, Calif., will discuss the IRS offer-in-compromise program as part of the Bankruptcy Taxation Committee's educational session at ABI’s Winter Leadership Conference, which will be held from Nov. 30 – Dec. 2, 2006, in Scottsdale, Ariz. Other topics on the agenda include an overview of BAPCPA tax changes, an update on centralized insolvency and a review of various "hot topics" from recent cases and legislation.