Q1.  What is the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA)?

A1.  The Tax Increase Prevention and Reconciliation Act of 2005, was signed into law by the President on May 17, 2006.  Section 509 of this law creates significant changes to the IRS Offer in Compromise (OIC) program by amending IRC 7122. 

Q2.  When will the TIPRA law be in effect? 

A2.  The law will become effective for all offers that are submitted to the IRS on, or after July 16, 2006. 

Q3.  How will TIPRA, Section 509 impact the OIC program?

A3.  TIPRA, Section 509, amends IRC 7122 by creating a new subsection (c) entitled, “Rules for Submission of Offers-in-Compromise.”  The new subsection (c) requires that offers submitted on, or after July 16, 2006, (and not subject to the waiver with respect to low-income taxpayers or offers filed under doubt as to liability only) must be accompanied by partial payments of the proposed offer amount.  The form of these partial payments depends on the taxpayer’s proposed offer and its terms.  The law also establishes a time period after which an offer would be deemed accepted by the IRS.

Q4.  What are the proposed offer and terms that would be in effect as of July 16, 2006?

A4.  Taxpayers filing offers (excluding doubt as to liability offers) would have to specify whether they are filing a lump sum or periodic payment offer.  

The new IRC 7122(c)(1)(A) subsection requires that a taxpayer filing a “lump sum” offer must pay 20 percent of the offer amount with the application. A “lump-sum” offer means any offer of payments made in five or less installments.

The new IRC 7122(c)(1)(B) subsection requires that a taxpayer filing a “periodic payment offer” pay the first proposed installment payment with the application and pay additional installments while the IRS is evaluating the offer. A “periodic payment offer” means any offer of payments made in six or more installments. 

Q5.  What time period has been established by TIPRA in relation to declaring offers accepted?

A5.  IRC 7122(f) as amended by TIPRA will cause the IRS to deem an offer “accepted” which is not withdrawn, returned, or rejected within 24 months after the IRS receipt date.  If a liability included in the offer amount is disputed in any judicial proceeding, that time period is omitted from calculating the 24 month timeframe.   

Q6.  Will all taxpayers be required to pay the payments imposed by TIPRA in order for the IRS to evaluate their offer in compromise?

A6.  No.  Taxpayers qualifying as low-income or filing a doubt as to liability offer only will not be required to pay the $150 application fee, nor make the partial payments for either lump sum or periodic payment offers.   

Q7.  What is a low-income taxpayer?

A7.  For OIC purposes, a low income taxpayer is an individual whose income falls at or below poverty levels based on guidelines established by the U.S. Department of Health and Human Services (HHS) under authority of section 673(2) Omnibus Reconciliation Act of 1981, or such other measure that may be adopted by the Service in the future. 

Q8. What will a taxpayer need to submit in order to claim to qualify as a low-income taxpayer who is not be required to pay the payments imposed by TIPRA?

A8.  As is the case when claiming exemption from payment of the $150 application fee, the taxpayer will need to complete the OIC Application Fee and Payment Worksheet, and Form 656-A, Income Certification for Offer in Compromise Application Fee and Payment.  Both the worksheet and the Form 656-A must be submitted with the Form 656 application. 

Q9.  Will a taxpayer need to submit two Form 656-A to claim exemption from the application fee and the TIPRA payments?

A9.  No, only one Form 656-A will be required and it will apply for both the application fee and the required TIPRA payments. 

Q10.  What will happen if the taxpayer submits a Form 656-A claiming to qualify as low-income and the IRS later determines that the taxpayer did not qualify?

A10.  If the OIC investigator concludes that the taxpayer’s income for the family size exceeds the levels for which a Form 656-A certification was allowed (e.g. the taxpayer should have paid the application fee and the partial offer payments), the offer investigation will immediately cease and the offer will be returned to the taxpayer.  The taxpayer will not have appeal rights to this decision.

Q11.  What happens if the taxpayer, who is not filing a doubt as to liability offer only, does not submit the payment imposed by TIPRA and does not qualify as low-income?

A11.  Failure to pay the 20 percent payment on a lump sum offer, or the first installment payment on a periodic payment offer will cause the IRS to return the offer back to the taxpayer as unprocessable.  See FAQ #14 if the taxpayer submits only a portion of the 20percent payment on a lump sum offer.

Q12.   Has the impact of TIPRA caused the IRS to change its processability criteria for offer submissions?

A12.  Yes.  As a result of TIPRA, effective on July 16, 2006, and thereafter, offers will be deemed unprocessable and returned back to the taxpayer along with the $150 application fee in the following situations:

• Taxpayer is in bankruptcy
• Taxpayer does not submit the $150 application fee, or a signed Form 656-A, Income Certification for Offer in Compromise Application Fee and Payment
• Taxpayer does not submit the 20percent payment, or portion thereof, with the lump sum offer, or a signed Form 656-A
• Taxpayer does not submit the initial payment with the periodic payment offer, or a signed Form 656-A

Q13.  What happens if a taxpayer only submits the $150 application fee with the offer?

A13.  If a taxpayer submits only the application fee and does not submit either the 20percent payment, or portion thereof, or the first installment payment, the offer will be deemed unprocessable and the $150 application fee will be returned to the taxpayer.

Q14.  What happens if a taxpayer submits a portion of the 20 percent payment on a lump sum offer but not the entire 20 percent payment?

A14.  A lump sum offer that is received with less than the required 20 percent payment will be deemed processable but the taxpayer will be asked to pay the remaining balance in order to avoid having the offer returned.  Failure to submit the remaining balance will cause the IRS to return the offer and retain the $150 application fee.

Q15.  Is compliance no longer a processability criterion for OIC submissions?

A15.  Correct.  Compliance will no longer be a processability criterion for OIC initial submissions.  If compliance is the only issue, the offer will be deemed processable.  However, IRS will contact the taxpayer by either telephone or correspondence requesting the delinquent return(s), and/or the required estimated tax payment(s).  A reasonable amount of time will be provided to the taxpayer to comply.  Failure to comply will cause the IRS to return the offer back to the taxpayer and retain the application fee.  The taxpayer will not have appeal rights to this decision.

Q16.   Does the taxpayer need to submit two separate remittance documents when filing an offer (e.g. one for the application fee and another for the required payments)?

A16.  The taxpayer should remit two checks, one for the application fee and the other one for the required TIPRA payment. If only one check is received, the IRS will apply the application fee first and then the remainder as the payment amount. 

Q17.  Are the payments imposed by TIPRA refundable to the taxpayer if the IRS later returns the offer back to the taxpayer?

A17.  Based on IRC 7122(c), the 20 percent payment on a lump sum offer and the installment payments on a periodic payment offer are considered “payments on tax” and are not refundable.

Q18.  Does TIPRA allow the taxpayer to designate how these payments should be applied?

A18.  Yes.  Taxpayers may designate the application of these required payments.  The designation must be made in writing when the offer is submitted or when the required payment is made, clearly specifying how the partial payments are to be applied to a particular tax period(s) and to specific liabilities (e.g. income taxes, employment taxes, trust fund portions of employment, excise tax, etc.) 

Q19.  What happens if the taxpayer does not submit a written request stating how the payments should be applied?

A19.  In the absence of any written request by the taxpayer when the offer is submitted or when the required payment is made, the IRS will apply the partial payment(s) in the best interest of the government.

Q20. Can a taxpayer designate how the $150 application fee is applied?

A20. No.  A taxpayer may not designate how the application fee is applied.  The OIC application fee reduces the assessed tax or other amounts due.

Q21.  What happens if a taxpayer who has paid the initial payment on a periodic payment offer fails to submit subsequent payments while the offer is under investigation?

A21.  The IRS will contact the taxpayer and provide one opportunity to pay the missing amount.  The offer will be declared withdrawn and returned back to the taxpayer if the taxpayer fails to submit the required amount.   All payment(s) previously made will be applied to the taxpayer’s account. The IRS will retain the application fee and the taxpayer will not have appeal rights to this decision.

Q22.  Is the IRS bound by the offer amount and terms submitted by the taxpayer in determining an acceptable offer?

A22.  No.  The IRS is not bound by either the offer amount or the terms.  The OIC investigator may negotiate a different offer amount and terms, when appropriate. The investigator may determine that the proposed offer amount is too low or the payment terms too protracted to recommend acceptance.  In this situation, the OIC investigator may advise the taxpayer as to what larger amount or different terms would likely be recommended for acceptance.   

Q23.  What will happen to payments the taxpayer makes during the offer investigation if the IRS later rejects the offer?

A23.  The IRS will credit the taxpayer’s account(s) with any payment(s) submitted with the original offer.

Q24.  Will a taxpayer be able to designate any partial payments in excess of the 20 percent paid with a lump sum offer, or in excess of the proposed installments paid under a periodic payment offer?

A24.  No.  Any partial payments that are made during the offer investigation that are in excess of the 20 percent lump sum offer amount, or in excess of the proposed installments paid under a periodic payment offer will be considered a deposit and may not be designated.