An offer in compromise (OIC) is an agreement or "deal" between a taxpayer and the IRS (Internal Revenue Service) that settles a taxpayer's tax debts (also called liabilities) for less than the full amount that is owed to the IRS. Taxpayers who can pay off their tax debts through an installment agreement (payment plan) or other means, most likely will not qualify for an offer in compromise. To qualify for an OIC, the taxpayer must have filed all of their 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.
In most cases, the IRS won't accept an OIC (offer in compromise) unless the amount offered by a 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. Figuring out the RCP can be tricky and when a tax payer or tax professional prepares an OIC, the analysis of what the IRS thinks you could still pay them is considered versus the offer that is made to the government. The reasonable collection potential (RCP) includes all of the total value from all of the taxpayer's assets, such as real property (land, real estate) vehicles, bank accounts, and other property. In addition to property, the RCP also includes anticipated future income less certain amounts allowed for basic living expenses which will vary from person to person. The IRS has standards for basic living expenses and the amount you can claim will depend on where you live, how many people are in your household, do you own a car versus take public transportation, etc. While it may not be difficult to ascertain this information, knowing how to properly communicate it in your OIC to the IRS is very important!
The IRS may accept an OIC based on three grounds:
First, the IRS can accept a compromise if there's doubt as to liability. A compromise meets this only when there's a genuine dispute as to the existence or amount of the correct tax debt under the law.
Second, the IRS can accept a compromise if there's 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.
Third, the IRS can accept a compromise based on effective tax administration. An offer may be accepted based on effective tax administration when there's no doubt that the tax is legally owed and that the full amount owed can be collected, but requiring payment in full would either create an economic hardship or would be unfair and inequitable because of exceptional circumstances.
This is just the tip of the iceberg when it comes to talking about offers in compromise. Before you submit an offer in compromise you should fully understand your tax situation. It is common to hear some tax resolution companies brag about how one of their clients paid pennies on the dollar versus what the client actually owed the IRS. While anytime a client can resolve their tax problems for less than they owe is a victory, please note that those types of results will not apply to everyone. Yes there are people that have had large debts settled for very small amounts in comparison to what was owed. However, the result does not fully explain the situation. The person settling their tax liability for such a low amount could have a multitude of reasons why their offer was accepted for such a low amount. Don't get sucked in or find your hopes up just because someone else got a great result. Let an experienced tax professional analyze your situation before you conclude that an offer in compromise is right for you. Even if you do not qualify for an OIC, don't run from your tax problem. Doing so will get you nowhere. You have options, you just have to figure out what is right for you. Email IRS tax debt resolution attorney at [email protected] to find out more about your options and all of the ways that you can get a handle on your IRS tax problems.