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Final Regulations on the IRS Offer in Compromise Application Fee

Tax Resolution Software

It’s official. The IRS has officially mandated an Offer in Compromise fee increase that will go into effect on April 27, 2020. Here are all the details you need to know to better understand the final regs and exemptions that may apply to your clients. 

TD 9894—User Fees for Offers in Compromise

In a final reg, the IRS has increased the offer in compromise fee to $205 and added another exemption from the fee for certain low-income taxpayers to conform with the Code.

Background: In general, an offer in compromise (OIC) is an agreement between a taxpayer and IRS that settles the taxpayer’s tax liabilities for less than the full amount owed. An OIC is generally not accepted if the IRS believes that the liability can be paid in full through a payment agreement or in a lump sum. The IRS looks at the taxpayer’s income and assets to make a determination of the taxpayer’s reasonable collection potential. (Code Sec. 7122)

Under Reg. § 300.3(b)(1), the user fee for processing an OIC is $186. The fee applies to all OICs accepted for processing, except that no fee will be charged if an offer is:

  1. Based solely on doubt as to liability (Reg. § 300.3(b)(1)(i)); or
  2. Made by a low-income taxpayer, defined as an individual who falls at or below the dollar criteria established by the poverty guidelines updated annually in the Federal Register by the Department of Health and Human Services or another measure that’s adopted by the IRS (Reg. § 300.3(b)(1)(ii)).

In 2016, the IRS proposed raising the OIC fee to $300. See Proposed regs would increase offer in compromise fee to $300 (10/20/2016).

Section 1102 of the Taxpayer First Act (P.L. 116-25) added Code Sec. 7122(c)(3). Code Sec. 7122(c)(3) exempts certain low-income taxpayers from payment of the user fee otherwise required in connection with the submission of an offer in compromise. These low-income taxpayers are individuals with adjusted gross income, as determined for the most recent tax year for which such information is available, which does not exceed 250% of the applicable poverty level (as determined by the IRS). Section 1102(b) of the Taxpayer First Act provides that Code Sec. 7122(c)(3) applies to offers-in-compromise submitted after July 1, 2019.

The final reg does two things:

First, it raises the OIC fee to $205 for OICs submitted on or after April 27, 2020. (Reg. § 300.3(b)(1)) Second, it adds another situation in which low-income taxpayers are exempt from the OIC fee by following the wording of Code Sec. 7122(c)(3) exactly. (Reg. § 300.3(b)(1)(iii))

The IRS will continue to biennially review the OIC fee, and it will adjust and increase the fee as appropriate. (Preamble to TD 9894)

Effective date: The final reg is effective April 27, 2020. (Reg. § 300.3(d))

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