An Offer in Compromise is basically a settlement with the IRS that comes in three basic forms, and describes a situation where the taxpayer agrees to make a lump sum payout, and in return the IRS agrees to wipe the original tax liability. These situations are Doubt as to Collectability, Doubt as to Liability, and Effective Tax Administration.
Sometimes the IRS will decide to decline an Offer in Compromise based on its financial analysis of the applicant’s reasonable collection potential (“RCP”), which represents the taxpayer’s ability to pay the original taxes owed. At that point, the applicant has a right to appeal that determination. Appealing a rejected Offer in Compromise; however, may be a difficult process.
The IRS Office of Appeals maintains a substantive separation from IRS enforcement, so that it can conduct an independent analysis of the applicant’s RCP to determine whether the Offer in Compromise should have been accepted. Sometimes Offers in Compromise are improperly rejected because, having found a basis for rejecting the Offer in Compromise, the IRS will immediately cease consideration of the overall application, thereby failing to account for Effective Tax Administration or Doubt as to Collectability. In other words, the IRS might reject an Offer in Compromise based upon the finding of a particular valuable asset, but fail to account for a liability that significantly offsets the applicant’s total ability to pay its tax liability. All of that said, the IRS Office of Appeals does not have the discretion to disregard IRS administrative guidance in considering an appeal.
The right to appeal only arises when an applicant receives a rejection of its Offer in Compromise, which will explain the reason for rejection and also provide detailed instructions on how to appeal the decision to the IRS Office of Appeals. That appeal must be made within 30 days of the date of the rejection letter.
Keep in mind that a rejection and a returned Offer in Compromise are not the same. An Offer in Compromise may be returned for any number of clerical, procedural, or administrative reasons, including the applicant’s failure to submit the necessary information, a bankruptcy filing, failure to include the application fee, or failure to pay current tax liabilities while the offer is under consideration. Unlike a rejection, a return affords no right to appeal, but there is nothing prevent the applicant from resending the Offer in Compromise following the correction of the deficiency cited in the rejection letter.