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 as a lump sum or through a payment agreement. 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. Taxpayers should beware that tax debts are not often settled through the Offer in Compromise program for “pennies on the dollar.”

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There are three possible grounds on which the IRS could choose to accept an Offer:

  1. Doubt as to Collectability: 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 law, (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 2004-2005. In 2006, the corporation accrued unpaid payroll taxes so vice president was personally assessed with the tax through a Trust Fund Recovery Penalty hearing, because it was determined that the vice president was a responsible party for the corporation’s unpaid payroll taxes. The vice president was no longer a corporate officer in 2006, she had resigned from the corporation on 12/31/2005. Because 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 should be assessed against her personally as a responsible party for the corporation in 2006.
  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, but there is doubt as to the effectiveness of collecting funds from Mr. and Mrs. Taxpayer. Collecting funds may result in Mr. & Mrs. Taxpayer becoming dependent on government assistance.