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. There are three types of Offers in Compromise:

1. Doubt as to Collectability – Doubt exists that the taxpayer could ever pay the full amount of tax, penalties, and interest owed within the remainder of the collection statute.

With this type of Offer, 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 plan. 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 living expenses.

2. Doubt as to Liability – Doubt exists that the assessed tax liability is correct. (1) penalties were assessed even though the taxpayer meets the criteria for non-assertion of penalties (reasonable cause), (2) during an audit, the examiner failed to consider the taxpayer’s evidence or the taxpayer has new evidence to substantiate positions taken on a tax return.

3. Effective Tax Administration – The assessed tax is correct and the IRS has determined that there is potential to collect the full amount of the tax owed, but an extraordinary circumstance exists that would allow the IRS compromise. 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, in violation of public policy, or inequitable.

Once a valid Offer in Compromise is filed, the IRS is prohibited from taking collection action against the taxpayer until after a determination is made and after the appropriate appeal period.

The IRS is not bound by either the offer amount or the terms proposed by the taxpayer. Often times, there is extensive negotiations between The OIC investigator and the taxpayer or representative.

Taxpayers have three options to pay the Offer In Compromise amount:

1. Lump Sum Cash Offer – Payable in non-refundable installments, the offer amount must be paid in five or fewer installments. The shorter the Offer amount will be paid, the less the IRS will accept.

If the offer will be paid in 5 or fewer installments in 5 months or less, the offer amount must include the realizable value of assets plus the amount that could be collected over 48 months of payments or the time remaining on the statute, whichever is less.

If the offer will be paid in 5 or fewer installments in more than 5 months and within 24 months, the offer amount must include the realizable value of assets plus the amount that could be collected over 60 months of payments, or the time remaining on the statute, whichever is less.

If the offer will be paid in 5 or fewer installments in more than 24 months, the offer amount must include the realizable value of assets plus the amount that could be collected over the time remaining on the statute.

2. Short Term Periodic Payment Offer – Payable in non-refundable installments; the offer amount must be paid within 24 months of the date the IRS received the offer. The first payment is due upon filing the Form 656. Regular payments must be made during the offer investigation.

The offer amount must include the realizable value of assets plus the total amount the IRS could collect over 60 months of payments or the remainder of the statutory period for collection, whichever is less.

3. Deferred Periodic Payment Offer – Payable in non-refundable installments; the offer amount must be paid over the remaining statutory period for collecting the tax. The first is due upon filing the Form 656. Regular payments must be made during the investigation.

The offer amount must include the realizable value of assets plus the total amount the IRS could collect through monthly payments during the remaining life of the statutory period for collection.