IRS Offer in Compromise Program

An offer in compromise (OIC) is an agreement between a taxpayer and the Internal Revenue Service (IRS) that resolves the taxpayer's tax liability. The IRS has the authority to settle, or compromise, federal tax liabilities by accepting less than full payment under certain circumstances. The IRS may legally compromise if the taxpayer establishes to the satisfaction of the IRS that the taxpayer either: has no means of paying the tax, or does not actually owe the tax.

Prior to 1992 the IRS has been reluctant to accept Offers in Compromise. In February of 1992, the IRS announced new procedures for Offers in Compromise. The new procedures greatly liberalized the Offer in Compromise process and increased the likelihood that financially distressed taxpayers would be able to compromise their liabilities for less than the full amount.

The IRS will accept an Offer in Compromise when it is unlikely that the tax liability can be collected in full and the amount of the Offer in Compromise reasonably reflects collection potential. An Offer in Compromise is a legitimate alternative to declaring a case as currently not collectible, or to a protracted installment agreement. The goal is to achieve collection of what is potentially collectible at the earliest possible time and at the least cost to the government

An Offer in Compromise is an agreement between taxpayer and the IRS that resolves the taxpayer’s tax bill for a lower amount. If you qualify for an Offer in Compromise, your tax problem can be settled for pennies on the dollar.

The IRS has the authority to settle or compromise federal tax liabilities by accepting less than full amount under certain circumstances. One of the following factors must be established in order for the IRS to accept an Offer in Compromise and settle the liability:

The taxpayer cannot pay off the liability;
There is doubt that the taxpayer actually owes the liability;
The settlement would promote effective tax administration

The Offer in Compromise program requires that subsequent to acceptance of an Offer in Compromise, the taxpayer must remain current on all tax obligations for a period five (5) years.

Can Anyone Submit an Offer in Compromise?

Most individual and business taxpayers who owe income taxes, payroll taxes, penalties or interest may submit an Offer in Compromise to settle these liabilities. The IRS will not accept offers from every single taxpayer who submits an offer. One of the following factors must be established in order for the IRS to settle the liability:

The taxpayer cannot pay off the liability;
There is doubt that the taxpayer actually owes the liability;
The settlement would promote effective tax administration

Prior to 1992 the IRS has been reluctant to settle tax liabilities. In February of 1992, the IRS announced new procedures for settling back taxes. The new procedures greatly liberalized the Offer in Compromise process and increased the likelihood that financially distressed taxpayers would be able to settle their liabilities for less than the full amount.

The IRS will accept an Offer in Compromise when it is unlikely that the tax liability can be collected in full and the amount of the Offer in Compromise reasonably reflects collection potential. An Offer in Compromise is a legitimate alternative to declaring a case as currently not collectible, or to a protracted installment agreement. The goal is to achieve collection of what is potentially collectible at the earliest possible time and at the least cost to the government.

If a taxpayer requests an Offer in Compromise based on effective tax administration, the IRS will first be required to establish that there is no doubt to liability or cellectibility

Offer in Compromise - Who is NOT Eligible?

A taxpayer is not eligible for consideration of an Offer in Compromise based on doubt as to collectibility or effective tax administration if:

Taxpayer has not filed all federal tax returns, or
Taxpayer is involved in an open bankruptcy case.

Furthermore, if an ongoing business taxpayer files an Offer in Compromise for payroll taxes, that business must have filed and deposited all payroll taxes on time for two quarters preceding the Offer in Compromise. The taxpayer must further deposit all payroll taxes on time during the quarter in which the Offer in Compromise was submitted.
The Offer in Compromise program requires that subsequent to acceptance of an Offer in Compromise, the taxpayer must remain current on all tax obligations for a period five (5) years. Therefore, if the taxpayer's Offer in Compromise is accepted and paid in full, but he later fails to pay current income taxes or other taxes, the Offer in Compromise might be revoked by the IRS.

How Do I Pay Off My Offer in Compromise?

The IRS No Longer Requires The Taxpayer to Immediately Come Up With All the Funds Once the Offer in Compromise is Accepted!

New IRS Offer in Compromise policies provide several options for making payments on an accepted Offer in Compromise.

Unless you have a special hardship case that warrants a lower Offer in Compromise amount, or can prove that you do not actually owe the tax bill, the IRS will generally apply the following principles in evaluating Offers in Compromise: In determining the amount that the IRS could collect from you, the IRS looks at the Reasonable Collection Potential to arrive at a minimum Offer in Compromise. In determining the Reasonable Collection Potential, the IRS looks at the following two factors: Your Realizable Value of your assets and your Future Income.

Generally an acceptable Offer in Compromise amount depends on the equity of your assets, your family's monthly income and how soon you are able to raise the money to pay off an acceptable Offer in Compromise. Once you submit an Offer in Compromise it may take the IRS roughly 6-18 months to investigate your Offer in Compromise. Therefore, the actual acceptance of your Offer in Compromise might not be issued for some time. Once you have received a notice of acceptance of your Offer in Compromise, you have the following options to make the payment:

Cash Offer

You must pay the cash offer within 90 days of acceptance. A Cash Offer in Compromise is figured by adding the realizable value of your assets, and the value of your disposable monthly income over 48 months.

Short Term Deferred Payment Offer

This payment option allows you to pay the Offer in Compromise in monthly payments over 2 years following the acceptance. A Short-Term Payment Offer in Compromise is figured by adding the realizable value of your assets, and the value of your disposable monthly income over 60 months.

Deferred Payments Offer

This payment option allows you to pay the offer amount in installments within the remaining statutory period for collecting the tax. The Offer in Compromise must include the realizable value of your assets plus the amount the IRS could collect through monthly payments during the remaining life of the collection statute. A Deferred Payment Offer in Compromise has three payment options:

Option 1: Full payment of the realizable value of your assets within 90 days for the date the IRS accepts your Offer in Compromise; and your future income in monthly payments during the remaining life of the collection statute.

Option 2

Cash payment for a portion of the realizable value of your assets within 90 days from the date the IRS accepts your Offer in Compromise; and monthly payments during the remaining life of the collection statute for both the balances of the realizable value and your future income;

Option 3

The entire offer amount in monthly payments over the life of the collection statute. Just as with short

Offer in Compromise-How Much Should I Offer?

In determining the amount of an acceptable Offer in Compromise, the IRS first makes a determination of the value of the taxpayer's assets on a discounted basis. Once a determination is made of the taxpayer's net worth on a quick sale basis, IRS then determines the taxpayer's ability to make future payments. In determining the amount of an acceptable Offer in Compromise, a cash value is assigned to that future ability to pay and that value is aggregated with the value of the taxpayer's assets to determine a value of an acceptable Offer in Compromise The aggregate number becomes the minimum amount which the taxpayer may pay in an Offer in Compromise to settle his tax liabilities.

Value of Your Asset: In determining the amount of an acceptable Offer in Compromise, the Realizable Value of your assets equals the net equity you have in all of your assets. The starting point for consideration of any Offer in Compromise will be based on the value of the taxpayer's assets, less any encumbrances, which have priority over the Federal Tax Lien. In determining the amount of an acceptable Offer in Compromise, the liquidating or quick sale value of assets will be used.

Your Future Income

In determining an acceptable Offer in Compromise amount, the IRS also takes into consideration the amount that can be collected from the taxpayer's future income.

In evaluating those future income prospects, the taxpayer's education, profession or trade, age and experience, health, and past and present income will be considered by the Offer in Compromise specialist. In evaluating future income potential an evaluation will be made of the likelihood that any increase in real income will be available to pay the delinquent taxes.

IRS generally determines the amount it could collect from your future income by subtracting necessary monthly living expenses from your monthly income over a set number of months. Generally the IRS will multiply your disposable monthly income by either 48 or 60 months to determine your future income.

Reasonable Collection Potential

A minimum acceptable offer is generally calculated by adding you realizable value of your assets plus your future income.

Why Does The IRS Settle Delinquent Tax Bills?

Internal Revenue Code authorizes the IRS, to accept less than full amount of tax liability owed in any civil or criminal case arising under the tax laws prior to the case's referral to the Department of Justice. For an Offer in Compromise to be accepted, the taxpayer must establish to the satisfaction of the IRS that the taxpayer either: has no means of paying the tax, or does not actually owe the tax.

I Don’t Owe The Tax Bill!

The taxpayer must prove that the amount of tax or any penalties being billed by the IRS are erroneous. This Offer in Compromise is generally used if a taxpayer was unable to defend himself against an assessment by the IRS, and has now discovered additional evidence to prove that the amount being billed is wrong. Offers in Compromise that cast doubt as to liability, other than 100% penalties, will be reviewed by the Examination Division of the IRS rather than the Collection Division. In reviewing such Offers in Compromise, the Examination Division will use guidelines similar to those used in making audit determinations. For this kind of Offer in Compromise to be successful, our tax attorneys must establish a valid question of law or fact that would render the liability in question doubtful.

I Can’t Pay The Entire Tax!

This is the most common type of Offer in Compromise. Under this type of Offer in Compromise the taxpayer makes a representation that based on the taxpayer's financial condition IRS will not be able to collect the entire tax bill from the taxpayer. This Offer in Compromise requires a detailed review of the taxpayer's financial condition.

The amount of this Offer in Compromise must reflect the amount of the equity in taxpayer's assets plus the amount that the IRS could collect from taxpayer's future income.

Special consideration could be made for taxpayer's advanced age or other special circumstances. Our tax attorneys often point out to the IRS the possibilities that our client is in ill heath and may not survive to pay the entire tax liability in question or that the taxpayer's skill are no longer as well compensated as they have been in previous years. The more special considerations our tax attorneys are able to present regarding each client's financial and personal circumstances, the more likely that the IRS will accept the proposed Offer in Compromise.

It’s Just Not Fair To Make Me Pay!

This type of offer requires the taxpayer to explain his exceptional circumstances, showing why requiring the payment of the tax liability in full would either create an economic hardship or would be unfair and inequitable.

The Offer in Compromise program requires that subsequent to acceptance of an Offer in Compromise, the taxpayer must remain current on all tax obligations for a period five (5) years. Therefore, if the taxpayer's Offer in Compromise is accepted and paid in full, but he later fails to pay current income taxes or other taxes, the Offer in Compromise might be revoked by the IRS. The agreement to remain current subsequent to acceptance of an Offer in Compromise creates a condition subsequent to the agreement.

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