Does IRS Offer in Compromise Eliminate IRS Criminal Penalties?

IRS tax relief

IRS Offer in Compromise & IRS Criminal Penalties

Attorney Robert Schaller says taxpayers may submit an IRS offer in compromise application to resolve IRS criminal penalties. The Secretary of the Treasury may compromise any criminal liability arising under the internal revenue laws prior to the reference to the United States Department of Justice for prosecution or defense. 26 U.S.C. § 7122(a).  So, a taxpayer must race to the IRS door prior to a referral to the DOJ.

An IRS agreement to compromise may relate to IRS criminal penalties and liability for taxes and interest. 26 C.F.R. § 301.7122-1(a)(2). The standard compromise agreement does not eliminate IRS criminal penalties. Unless the terms of the accepted offer expressly provide otherwise, acceptance of an offer to compromise a civil liability for IRS back taxes does not remit a criminal liability. Conversely, the IRS’ acceptance of an offer in compromise of IRS criminal penalties does not remit a civil liability. 26 C.F.R. § 301.7122-1(a)(2).    

IRS Offer in Compromise Is Not Available for Taxpayers Who Commit Fraud

Life is not simple for taxpayers attempting to eliminate IRS criminal penalties though the IRS’s Fresh Start Initiative, aka IRS Offer in Compromise. Notwithstanding the above discussion, criminal liability will not be compromised unless it involves only the regulatory provisions of the Tax Code and related statutes. 26 C.F.R. § 601.203(a)(2). Watch out, criminal liabilities will not be compromised if the violations involving the regulatory provisions are deliberate and with intent to defraud. 26 C.F.R. § 601.203(a)(2). 

Criminal Restitution v. IRS Criminal Penalties

The IRS is an aggressive collection enforcer. Sometimes the IRS collects IRS back taxes owed the IRS. Other times the IRS collects on behalf of others – the most common of which is the collection criminal restitution from taxpayers. Therefore, a distinction is made between “criminal penalties” and “criminal restitution.” Restitution is the legal way for victims to be paid back for a crime via a restitution order entered by a court. The IRS can be the collection arm that enforces the restitution order. The purpose of restitution is to compensate a victim, while the purpose of penalties is to punish the taxpayer.

Civil Offer in Compromise Can be Accepted Despite Existence of Criminal Restitution Order

An offer may be accepted from a taxpayer who also has been ordered to pay criminal restitution. Although the IRS is authorized to pursue collection of a restitution-based assessment (RBA), an Offer in Compromise may only include a taxpayer’s civil tax liabilities, not any criminal restitution.

The acceptance of an offer to compromise with a civil tax assessment does not impact the validity of the restitution-based assessment and the taxpayer is still responsible for any outstanding balance of the restitution-based assessment.

Contact Attorney Robert Schaller if you have any questions regarding IRS criminal penalties and the elimination of those penalties through the IRS’ Fresh Start Initiative and the IRS offer in compromise program. Tax professional may be interested in learning more by reading Robert Schaller’s book titled “IRS Offer in Compromise, Installment Agreements &Innocent Spouse Relief< which is available for purchase at National Offer in Compromise Academy’s bookstore. Click here for the link to the bookstore. Also tax professionals should consider taking The OIC Academy’s 61 online courses and 25 instructional videos. Click here to review the online course selection.