What is an IRS Offer in Compromise?

It happens sometimes that a taxpayer gets into a situation where it seems insurmountable to pay off a tax debt that has been created. Whether it is because the taxpayer is self-employed and had income that did not have withholding, or some other unfortunate circumstance, the debt to the IRS seems insurmountable and may even be growing.

You may have even heard advertisements on the radio or late night television for firms that will help reduce or eliminate your tax obligation with the IRS.

The IRS has a provision in place which allows qualified individuals with an unpaid tax obligation to potentially settle that debt for less than the amount owed. The process is called an Offer in Compromise or OIC.

The objective of the OIC program is for a negotiated compromise to result that is in the best interest of both the government and the taxpayer. This is NOT just a method to run up a debt with the government and then easily walk away from the obligation.

At least one of three specific conditions must be met to qualify for the OIC Program.

There must be doubt as to the validity of the liability. If the taxpayer can show reasonable doubt that the assessed tax liability is correct there may be relief through the OIC Program. The taxpayer will need to establish that they have not otherwise had the ability to dispute the tax liability.

An Offer in Compromise based on this premise does not require financial information to be submitted. However, the IRS sends out numerous communications to a taxpayer prior to finalizing the assessed balance, so this approach generally is not used successfully very often.

The second condition that may qualify for Offer in Compromise relief is the Doubt as to Collectability approach. If the debtor can show that the debt is likely uncollectible in full by the IRS under any circumstances there may be a compromise available.

The IRS has an established formula involving disposable income of the taxpayer has available to make payments on the debt. A taxpayer must complete a form provided by the IRS based on the nature and type of their income and essentially provides a financial statement to the IRS which identifies all assets and liabilities as well as income and expenses.

The third and final manner to qualify under the OIC program is called the Effective Tax Administration condition. In this condition the debtor does not contest the liability or the collectibility, but must demonstrate extenuating or special circumstances whereby the collection of the debt would create an economic hardship or would be unfair or inequitable.

This condition is available to all taxpayers but is primarily used by the elderly, disabled, or those with extenuating circumstances.

Negotiating an Offer in Compromise will not automatically release a tax lien, and it is only after the full amount of the offer has been paid in full that any IRS tax liens will be released. Once offer has been paid, the taxpayer must request that the IRS remove the lien.

It is also important to note that there are numerous unscrupulous promoters that claim to settle tax obligations for “pennies on the dollar.” When a company requests payment from the taxpayer upfront to begin the process, this may end up proving to be money down the drain for the taxpayer.

A taxpayer is not required to obtain outside representation for an OIC, and it may be in the taxpayer’s best interest to negotiate the offer themselves.

If the initial offer is not accepted the taxpayer may apply again, and the taxpayer may also appeal a rejected Offer in Compromise as well.