2008 Taxpayer's Advocate report to Congress, see the document page labeled page #27 et seq. for OIC "Most Serious Problems" discussion.  (found on the PDF file page 42 of 351)   http://www.irs.gov/pub/irs-utl/08_tas_arc_intro_toc_msp.pdf

Delinquent Taxes

A taxpayer who has a delinquent tax obligation basically has five options to deal with the delinquent obligation: (Click on a Topic to Learn More) 

1. Pay the Full Balance of the Tax Due.
    
2. Inform the IRS of Currently Non-Collectible Status.
    
3. Installment Agreement.
    
4. Offer-In-Compromise (“OIC”).
    
5. Bankruptcy.

http://www.taxatty.net/

Here's the truth regarding Offers-in-Compromise.  The basics on Offer-in-Compromise that most people do not learn until after they've shelled out a substantial up-front fee to the advisor:


The passage of H.R. 3 the Safe, Accountable, Flexible and Efficient Transportation Act of 2005 could effectively destroy the offer in compromise (OIC) program by requiring partial payments of 20% with each OIC submission request.  Not only will taxpayers be less willing to pay 20% for a shot at getting their offer accepted by the IRS, but tax advisors will be less willing to suggest that a prepayment with an OIC be submitted when the historic odds of rejection have been something like five in six - with the IRS retaining your 20% payment after they reject your offer.  Not to mention that the new provisions require monthly installment payments after the 20% prepayment and continuing until the IRS either accepts or rejects your OIC.



IRS Policy Statement P-5-100
http://www.irs.gov/businesses/small/article/0,,id=111920,00.html

Offers will be accepted: The Service will accept an offer in compromise when it is unlikely that the tax liability can be collected in full and the amount offered reasonably reflects collection potential. An offer in compromise is a legitimate alternative to declaring a case currently not collectible or to a protracted installment agreement. The goal is to achieve collection of what is potentially collectible at the earliest possible time and at the least cost to the Government.

In cases where an offer in compromise appears to be a viable solution to a tax delinquency, the Service employee assigned the case will discuss the compromise alternative with the taxpayer and, when necessary, assist in preparing the required forms. The taxpayer will be responsible for initiating the first specific proposal for compromise.

The success of the compromise program will be assured only if taxpayers make adequate compromise proposals consistent with their ability to pay and the Service makes prompt and reasonable decisions. Taxpayers are expected to provide reasonable documentation to verify their ability to pay. The ultimate goal is a compromise which is in the best interest of both the taxpayer and the Service. Acceptance of an adequate offer will also result in creating for the taxpayer an expectation of and a fresh start toward compliance with all future filing and payment requirements.

Offer in Compromise: The IRS may compromise or eliminate a tax bill on the grounds of:

• doubt as to the liability for the amount owed;
• doubt as to ability to make full payment of the amount owed; 
• if there is no doubt as to either liability or collectibility, promoting effective tax administration (ETA) in exceptional circumstances or to avoid economic hardship.
• bankruptcy
• special circumstances: advanced age, serious illness from which recovery is unlikely or unusual circumstances that impact the ability to pay the total reasonable collection potential (RCP) and continue to provide for the necessary expenses for the taxpayer and his/her family.
• http://www.irs.gov/businesses/small/article/0,,id=111979,00.html#eta

The doubt as to the liability for the amount owed must be supported by evidence and the amount acceptable to the IRS depends upon the degree of doubt found in the particular case.

In the case of inability to pay, the amount offered must exceed the total value of your equity in all your assets, and must give sufficient consideration to present and future earning capacity. If an offer is accepted, the IRS may also require you to agree to pay a percentage of future earnings as part of the offer and to relinquish certain present or potential tax benefits.

Hardship: If you can show that collection of the tax debt would cause a hardship for you or your family, such as preventing you from meeting necessary living expenses, the IRS may defer its collection actions. Then, after about one year, it will review your case to determine if the hardship still exists. The IRS may also enter into a compromise agreement with you.

Bankruptcy: You may also consider bankruptcy. The filing of a bankruptcy petition effects a stay on further IRS collection actions. The IRS may then file a claim for the unpaid taxes with the bankruptcy court. The court can determine whether and when these taxes are to be paid. In addition, certain taxes which cannot be paid from the bankruptcy estate may be discharged. Discharge is generally limited to taxes incurred more than three years before the bankruptcy petition is filed.

 

Offer in Compromise: new The IRS may compromise a tax bill even for people in bankruptcy pursuant to a recent tax case: Wm K Holmes, 298 BR 477 (2003) because in spite of the fact the the Internal Revenue Manual does not allow the IRS to even consider any OIC from a taxpayer who has filed for bankruptcy, it was decided in favor of the taxpayer in this case since the Internal Revenue Manual is not binding and since it conflicts with congressional intent in allowing OIC and the rules of bankruptcy.
 

Offer In Compromise - Frequently Asked Questions
 

Tax Court offers no help for AMT on ISO exercise

Ronald Speltz thought that his employer was doing him a favor by issuing him ISOs to augment his salary, which was about $70,000 a year. Instead, the ISOs triggered a tax nightmare when he exercised them before the tech bubble burst, leaving him with nearly worthless stock but with an unexpected tax bill of close to $225,000.

Although Speltz and his wife borrowed $134,000 to help pay state and federal taxes, and offered the cash value of his life insurance policy as a compromise for the remainder, the Internal Revenue Service rejected his offer.

The Tax Court agreed.

Even though the offer-in-compromise provisions include a compromise to promote effective tax administration - explained by the regs to cover situations "where collection in full could be achieved but would cause economic hardship" - the court found that the Speltzes had sufficient income to meet "basic living expenses" and therefore didn't qualify. The court said that it sympathized with the situation, but it is up to Congress, not the courts or the IRS, to come up with a solution.

The ISO AMT crisis is causing extreme financial hardship for many employees of small and large companies, according to the Coalition for Tax Fairness, an organization working to resolve the anomaly. The AMT tax often results in taxes exceeding 400 percent of these employees' annual salaries, with the double whammy that they never see any actual income from the worthless stock.

"We are crushed and disheartened that the Tax Court did not grant relief, as we have always believed that the laws are intended to be fair for all Americans," said Ron Speltz. "Being forced to pay more than 11 times what the normal taxpayer would pay in taxes is destroying us financially and has caused immense stress and hardship for more than four years. We plead with Congress to please act quickly to put an end to this nightmare, before we lose everything we have and are destroyed financially for years to come."

Unfortunately for the Speltzes, the Tax Court opinion leaves no legal option, according to Tim Carlson, the attorney for the Speltzs and president of the Coalition for Tax Fairness.

"The only hope for the Speltzes, and others like them, is for Congress to take action to correct this serious injustice," Carlson said, adding, "I am encouraged at the attention that Congress is paying to this issue, and the bi-partisan support that is building in both the House and Senate for legislation to correct this unintentional harm to hardworking, honest taxpayers."

"It is unfair, considering all of the factors," agreed Laurie Asch, senior tax analyst at New York-based RIA. "But the courts maintain that even though the law is unfair, it's unfair to everyone, and the taxpayer has not shown that it's unfair to him specifically. Therefore they say it's up to Congress to fix, not the courts."

"The fact that it's a hot topic probably worked against the taxpayers," she noted. "It shows that Congress is aware of the discrepancy but hasn't chosen to address it."

That will change, hopes Carlson, who has been working with several groups and congressional tax writers to draft legislation that would address the problem.

"They were looking at what Congress wanted them to do and they got blindsided," he said. "For most people, the worst that can happen is they lose everything, but for someone hit with the ISO AMT, they lose everything and find themselves in a negative hole. The Speltzes lost $30,000 on the stock, plus they end up owing a quarter of a million dollars."

Carlson believes that the equitable relief provision, added in 1998 legislation, should cover cases like the Speltzes. "I think they're entitled to relief under the plain language of the statute and the regs," he said. "The IRS is working a double standard - here they claim to follow the strict letter of the law, yet they undermine the congressional intent behind the equitable relief posited by Code Section 7122. On the other hand, they're quite willing to go beyond the strict letter of the law and follow 'economic substance' when the topic is tax shelters."

Dayton, N.J.-based CPA and attorney E. Martin Davidoff, tax liaison chair for the American Association of Attorney-CPAs, likewise sees a legislative fix as the solution.

"This is a case for Congress to fix, and Congress really should just fix it," he said. "The case highlights the problem with the market going down precipitously. The stock loss suffered by taxpayers in these circumstances leaves them without any income, and with no means to pay tax on the phantom income."

"It's a terrible inequity on people that it hits, and Congress could fix it by simply raising the rate a fraction of a point and eliminating the ISO as a tax preference."

In a recent report to Congress, National Taxpayer Advocate Nina Olson made it clear that she believes the effective tax provisions in the code would cover unfair application of the AMT.

"The IRS summarily rejects ETA (effective tax administration) offers in cases where one of the inequities faced by the taxpayer is an 'unfair' operation of the AMT," she stated. "The IRS reasons that a compromise of AMT liabilities would circumvent the will of Congress. However, this position overlooks the possibility that the 'unfair' operation of the tax rules may be one of many factors that may justify the acceptance of an ETA offer based upon the unique circumstances of a particular taxpayer."

For his part, Speltz was only vaguely aware of the consequences when he exercised his options in 2000.

"I knew there would be some tax, but I had no idea it would be that much, nor any idea it would be that unjust," he said. "I thought that 'income tax' means you're taxed on income, and we had no income, so I didn't think it would amount to much."

http://www.webcpa.com/article.cfm?articleid=12107&pg=acctoday