The IRS's Offer in Compromise: A Practical Guide

An OIC can resolve back taxes for less than you owe — but only when the math, the disclosures, and the timing line up.

The Big Picture: The IRS offers a program allowing taxpayers to settle their tax debts for less than the full amount owed through an Offer in Compromise (OIC). A compromise that serves the interests of both the IRS and the taxpayer is the ultimate objective. However, the strict requirements of the program mean that not everyone will qualify.

Background: The Offer in Compromise Program is part of the Fresh Start program. The program allows those who have made mistakes in the past to receive a break on their back taxes in exchange for paying and filing their taxes timely moving forward.

Who is Eligible? An offer in compromise is usually accepted by the IRS if the offer provided is the maximum that can reasonably be anticipated to be collected in a reasonable amount of time, one or two years, depending on the type of OIC. In general, you must make a reasonable offer depending on what the IRS considers your ability to pay. Ability to pay takes into account the specific set of facts and circumstances on a case-by-case basis, which includes “capacity to pay; income; costs; and equity in assets.”

To qualify for an OIC, you meet the following criteria:

• You have made all required estimated tax payments and filed all necessary tax returns.

• You have received a bill with at least one tax debt included on your offer.

• If you are a business owner with employees, you have made all required tax deposits for the previous two quarters as well as the current quarter.

• You are not currently involved in an active bankruptcy case.

• If you are requesting an extension for the current year’s return, you have a valid extension.

If you have the ability to pay your tax debt in full through other means, such as an installment plan or equity in your assets, the IRS will likely reject your offer.

Payment Options: When submitting an OIC, you will generally need to include an initial payment and the application fee. There are two payment options:

Lump Sum: Pay 20% of your offer amount upfront, with the remainder due within five or fewer payments after acceptance. No payments are required while the IRS is reviewing the Offer.

Periodic Payment: Pay the initial payment with your offer, then make monthly payments over six to 24 months. Monthly payments are required while the IRS reviews the Offer.

How it Works: An OIC is typically based on the taxpayer’s (1) equity in assets and (2) disposable income on a monthly basis. Therefore, to determine an offer amount, you will need to gather information on your assets, income, debts, and expenses, such as:

• Complete bank statements for the last three months (or six months for business accounts).

• Recent statements for all investment and retirement accounts.

• Recent loan statements (e.g., mortgages, second mortgages, vehicle loans) showing monthly payments, loan payoffs, and balances.

• Trust documents, if applicable, and other documents.

• Proof of income such as paystubs, pensions and Social Security statements, court orders for alimony, etc.

• For business owners, additional documentation such as a current profit and loss statement may be required.

Between the Lines: The IRS generally cannot take any collection action against you, such as filing a lien or garnishing a bank account or wages while your OIC is pending. However, during this period of non-collection, the ten-year time period the IRS has to collect a tax is extended. Further, filing an OIC can extend the waiting period before you are eligible for relief in bankruptcy. Therefore, it is important to consider your complete circumstances with a tax professional before considering an OIC.

Wrapping it All Up: In conclusion, the IRS’ Offer in Compromise program provides a valuable opportunity for taxpayers facing financial hardship to settle their tax debts for less than the full amount owed. However, the eligibility criteria and the strict requirements mean that not everyone will qualify. It is essential to assess your financial situation, including income, assets, and expenses, and seek guidance from a tax professional to determine if an OIC is the best solution. While the program can offer significant relief, it is important to be aware of its limitations, such as the extension of the statute of limitations and potential complications with bankruptcy.

For a complete review of your situation from a tax attorney please contact us to discuss your options. You may also call (917)-746-2211.