An offer-in-compromise (OIC) is an agreement between a taxpayer and the Internal Revenue Service that resolves tax liabilities for less than the full amount of the tax debt. However, if the tax debt may be fully paid through an installment agreement or another payment arrangement, the taxpayer will typically not be eligible for an offer-in-compromise.
Eligibility for an offer-in-compromise requires that a taxpayer must have filed all tax returns; made all required estimated tax payments for the current year; and made all required federal tax deposits for the current quarter if the taxpayer is a business owner with employees.
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) of the debt. The IRS determines "reasonable collection potential" by simply measuring a taxpayer’s ability to pay the outstanding tax debt. The RCP is the value that may be realized from a taxpayer’s assets, including anticipated future income, less permissible amounts for basic living expenses.
The IRS determines if an OIC is qualified by computing a taxpayer’s ability to pay the tax debt before the time to collect the debt expires based on the expiration date of the collection statute of limitation. Thus, the decision of the IRS to accept an OIC is based on objective data and formulas much more than any subjective analysis.
The IRS may accept an Offer in Compromise Settlement based on three grounds:
- Doubt as to Liability. Acceptance of an OIC may be permitted if there is genuine doubt of liability and the IRS has correctly determined the amount owed.
- Doubt as to Collectibility. Acceptance of an OIC may be permitted if there is any doubt that the amount owed is fully collectible. Doubt as to collectibility exists in any case where the taxpayer’s assets and income are less than the full amount of the tax liability.
- Effective Tax Administration. Acceptance of an OIC may be permitted based on effective tax administration. This occurs when there is no doubt that the tax is legally owed and that the full amount owed is collectible, but demanding payment in full would either create an economic hardship or be unfair and inequitable as a result of exceptional circumstances.
Stay tuned for more on offers-in-compromise in the next blog. If you have questions about the IRS Offer-In-Compromise Program, call Loan Lawyers. Our South Florida consumer rights and debt defense attorneys help individuals with problems related to the payment of their debts. If you have assets subject to an IRS tax lien, we can help. Contact our office today by calling (888) FIGHT-13 (344-4813) and see how we can help.