What Is an Offer in Compromise?
If you’ve found yourself drawing the ire of the IRS due to unpaid tax debts, you might be wondering what your options are. Well, one of the most enticing is the offer in compromise, or OIC. This allows you to potentially satisfy your tax debt for less than what you fully owe. Sounds like a good deal, doesn’t it? It is if you can get it, as the IRS has the right to reject a taxpayer’s OIC.
The OIC is a program where the IRS is essentially acknowledging that “getting something is better than getting nothing.” Based on some television commercials or wishful thinking, you might be hoping that you can clear your tax debt for “pennies on the dollar.” Well, that’s usually not the case.
As its name indicates, the taxpayer is making an offer to the IRS to clear a tax debt. This gives the IRS the right to reject the taxpayer’s offer and in most cases, the IRS does. In fact, the IRS rejects about 60% of the OIC requests they receive. So how does the IRS decide which OIC to accept and which to reject?
Why the IRS Will Accept an Offer in Compromise
There are three main reasons the IRS will accept an OIC. The first reason is that there are questions as to whether the IRS can collect the entire tax debt. Many taxpayers get behind on their tax obligations because they simply don’t have the financial ability to pay what they owe. The IRS knows this and they realize they shouldn’t waste their time trying to get blood from a stone.
The second reason has to do with the legal basis for the tax debt. Sometimes the taxpayer may have a reasonable argument to contest either the amount of the tax debt or the legal basis for its collection in the first place. To avoid risking a possible tax lawsuit, the IRS may agree to a reduced tax amount. Even if the IRS were to succeed in litigation, it will add to the time and effort it takes for the IRS to get its money.
Finally, there’s “effective tax administration.” This refers to an undisputed tax debt, in both amount and basis for collection. However, the IRS realizes that collecting the tax debt would be unfair, inequitable or place an unreasonable economic hardship on the taxpayer.
These reasons are fairly straightforward, at least conceptually. And while applying for an OIC isn’t the simplest thing to do, it can generally be taken care of, especially with the help of a tax professional.
The biggest trick is making an offer to the IRS that it will be willing to accept. Remember, the IRS is not legally required to accept a taxpayer’s OIC simply because they meet the basic eligibility requirements and complete the paperwork properly.
How Much Should the Taxpayer Offer the IRS?
At a bare minimum, the IRS will only consider an OIC if the taxpayer’s offer is at least equal to the positive equity a taxpayer has in what they own (real property, vehicles, assets, etc.) plus the excess monthly income a taxpayer has after paying their basic living expenses. Basically, it’s the taxpayer’s net worth plus whatever they have leftover each month after paying their monthly bills.
When you think about it, it makes perfect sense. The IRS can always go after a taxpayer’s wages and property. So why would the IRS accept an amount that’s less than what they could get from a tax lien or levy? You’re right, they wouldn’t.
Want to Request an Offer in Compromise?
If you’re interesting an OIC, consider meeting with a tax professional first. There are some drawbacks to the OIC and it’s not free to apply for one. A tax attorney will be able to better weigh the pros and cons of an OIC for your particular situation.