A new law has been enacted that increases the cost to taxpayers who submit an offer in compromise to the IRS.  In addition to a $150 user fee, a portion of the settlement amount must also be paid when requesting an offer.  For taxpayers who propose to make a lump-sum settlement, they must also submit 20% of the offer amount up front.  For offers that will be paid in monthly installments, all proposed installment payments must be made while the IRS investigates the offer.

On a bright note, if the IRS fails to process an offer within two years, the offer is deemed to have been accepted.

This law becomes effective with offers that are received by the IRS on or after July 16, 2006.

The following statistics are based on all offers in compromise that were submitted to the IRS during the years 2001 through 2004.

Tax Year 2004

• Number of offers received: 106,000
• Number of offers accepted: 20,000
• Percentage of total accepted: 19%
• Average amount of each offer: $14,000

Tax Year 2003

• Number of offers received: 128,000
• Number of offers accepted: 22,000
• Percentage of total accepted: 17%
• Average amount of each offer: $11,000

Tax Year 2002

• Number of offers received: 124,000
• Number of offers accepted: 29,000
• Percentage of total accepted: 23%
• Average amount of each offer: $10,000

Tax Year 2001

• Number of offers received: 125,000
• Number of offers accepted: 39,000
• Percentage of total accepted: 31%
• Average amount of each offer: $9,000

SOURCE: IRS Data Book, FY 2004, Publication 55b.

The IRS has a general policy of not considering an offer in compromise received from a taxpayer that has filed for bankruptcy protection.  However, a bankruptcy court recently held that the IRS must consider a taxpayer’s offer even while that individual was in bankruptcy status.  The court reasoned that the tax codes and regulations authorized the IRS to consider an offer in compromise in all cases, and these sources of legal authority were superior to the IRS policy of simply not doing so. In re: Charles Peterson, Bnkr. D. Neb., No. BK03-40948.

It will be interesting to see how this court decision will affect IRS policy, and whether the ruling will be uniformly applied in all offer in compromise cases that involve bankruptcy.