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Procedure for an Offer in Compromise

An offer to enter into a compromise agreement is called an Offer in Compromise. Offers in compromise 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 Service time to review the offer. This gives the  Remittance of the amount offered in compromise, or a deposit if the offer is to pay in installments, must also accompany the offer.

Inability to Pay Offers

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 Compromise

After 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:
  1. mutual mistake of fact as to the agreement
  2. falsification or concealment of assets by the taxpayer
  3. grounds sufficient to set aside a contract generally.
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.
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