An Offer in Compromise (OIC) is an agreement between the taxpayer and the government that settles a tax liability for payment of less than the full amount owed. The IRS will generally accept an OIC when it is unlikely that the tax liability can be collected in full and the amount offered equals at least the amount that the IRS calculates that it can collect from the taxpayer’s equity in assets and disposable monthly income. This determination is referred to as the "reasonable collection potential."  The IRS views an OIC as a reasonable alternative to declaring a case currently not collectible or entering into a "protracted installment agreement" with a taxpayer. A "protracted installment agreement" is defined as being one that extends beyond the period allowed under IRS issued guidelines.

The IRS goal in approving an OIC is to achieve collection of the amount that it believes to be potentially collectible from a taxpayer at the earliest possible time and the least cost to the government. In addition to its collection goal, the IRS expects that its acceptance of an adequate offer will result in creating for the taxpayer a fresh start toward compliance with all future filing and payment requirements. Once an offer is accepted, the taxpayer must remain in compliance with all filing and payment requirements for the next five years.

In order to submit, and ultimately receive IRS approval, of an Offer in Compromise, a taxpayer is required to provide the IRS with a wide range of financial documentation used to evaluate the taxpayer’s ability to pay. The IRS considers the amount that could be obtained from the equity in your house and other assets, plus any additional amount that you should "reasonably" be able to pay from your monthly budget. Your OIC package will include a recent financial statement prepared on an IRS Form 433-A (Individual or Self-Employed Taxpayers) and/or Form 433-B (Business Taxpayers), and is often supported by recent bank statements, tax returns, paystubs, house and property appraisals, deeds, car titles, monthly expense invoices and receipts, and a variety of other financial documents.

These documents are used by the IRS to confirm your eligibility for an OIC and determine the settlement amount it will accept. The IRS reviews your financial information in the light of its own income and expense standards. The IRS does not compute your "reasonable collection potential" by subtracting your actual monthly expenses from your monthly income. Rather, the IRS determines your allowable monthly expenses by using a complex set of artificial national and local expense standards based on family size and yearly income.  

After the IRS completes its review, it makes a determination whether to accept or reject to reject or accept the Offer in Compromise.  If the Offer in Compromise is rejected, the taxpayer has a variety of alternatives available.  For example, the taxpayer can appeal to the IRS Appeals Office, and ultimately, the United States Tax Court, propose an alternative collection method (for example, an Installment Agreement), or seek to be classified as Currently Not Collectible. On the other hand, if the Offer is accepted, the taxpayer is required to make the payments proposed in the Offer and the remaining amount of the taxpayer’s tax liability is forgiven. Remember, however, in addition to the payment requirements of an approved Offer, the taxpayer must then remain compliant with future tax filings and payments for the next five years or the Offer will be revoked and all benefits lost. If a taxpayer fails to remain complaint, the Offer will be annulled and all delinquent taxes will once again be due and owing. 

For taxpayers that qualify, an Offer in Compromise is an excellent way to resolve a tax problem and get a fresh start with the IRS. However, the decision to make an Offer in Compromise is complicated and success depends on the proper application of knowledge, experience and attention to detail. If you have a problem with delinquent taxes, begin to solve your problem today by completing the Consultation Request form or by calling our law office at (301) 656-8528.