IRS Offer in Compromise
An Offer in Compromise is a path offered by the IRS that allows qualified taxpayers to clear a liability for an amount under the assessed amount.
Priority One: Ensuring our Clients Pay the Least Amount Possible under the Tax Code
Can I Really Pay the IRS Less than I Owe?
As the above examples show, it is possible. It is, however, crucial that you understand that the IRS accepts less than it’s owed in a minority of cases. So, do not stop paying your taxes because you think the IRS will give you a break down the road!
Honestly, there are so many factors to consider if you should attempt submitting an Offer in Compromise that you should have a quick conversation with one of our tax relief experts. Below you can read more about the Offer in Compromise.
What is an Offer in Compromise?
An offer in compromise (OIC) is an agreement between a taxpayer and the Internal Revenue Service that settles the taxpayer’s tax liabilities for less than the full amount owed. Absent special circumstances, an offer will not be accepted if the IRS believes that the liability can be paid in full or through a payment agreement. This is often advertised as the “Pennies on the Dollar” program. The truth is, few people qualify, and even fewer are successful in properly preparing the complex OIC proposal for the IRS unless they have the help of an experienced tax resolution specialist.
In most cases, the IRS will not accept an OIC unless the amount offered by the taxpayer is equal to or greater than the reasonable collection potential (RCP). The RCP is how the IRS measures the taxpayer’s ability to pay and includes the value that can be realized from the taxpayer’s assets, such as real property, automobiles, bank accounts, and other property. The RCP also includes anticipated future income, less certain amounts allowed for basic living expenses.
The IRS is not bound by either the offer amount or the terms proposed by the taxpayer. The OIC investigator may arrange a different offer amount and terms, when appropriate. The investigator may determine that the proposed offer amount is too low or the payment terms are 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.
Three Types of OICs
The IRS may accept an offer in compromise based on three grounds:
1. Doubt as to Collectibility – Doubt exists that the taxpayer could ever pay the full amount of tax liability owed within the remainder of the statutory period for collection.
Example: A taxpayer owes $20,000 for unpaid tax liabilities and agrees that the tax she owes is correct. The taxpayer’s monthly income does not meet her necessary living expenses. She does not own any real property and does not have the ability to fully pay the liability now or through monthly installment payments.
2. Doubt as to Liability – A legitimate doubt exists that the assessed tax liability is correct. Possible reasons to submit a doubt as to liability offer include: (1) the examiner made a mistake interpreting the tax code, (2) the examiner failed to consider the taxpayer’s evidence or (3) the taxpayer has new evidence.
Example: The taxpayer was vice president of a corporation from 2005-2008. In 2009, the corporation accrued unpaid payroll taxes and the taxpayer was assessed a trust fund recovery penalty as a responsible party of the corporation. The taxpayer was no longer a corporate officer and had resigned from the corporation on 12/31/2018. Since the taxpayer had resigned prior to the payroll taxes accruing and was not contacted prior to the assessment, there is legitimate doubt that the assessed tax liability is correct.
3. Effective Tax Administration – There is no doubt that the tax is correct and there is potential to collect the full amount of the tax owed, but an exceptional circumstance exists that would allow the IRS to consider an OIC. To be eligible for compromise on this basis, a taxpayer must demonstrate that the collection of the tax would create an economic hardship or would be unfair and inequitable.
Example: Mr. & Mrs. Taxpayer have assets sufficient to satisfy the tax liability and provide full-time care and assistance to a dependent child, who has a serious long-term illness. It is expected that Mr. and Mrs. Taxpayer will need to use the equity in assets to provide for adequate basic living expenses and medical care for the child. There is no doubt that the tax is correct.