Offers in Compromise (OIC) are agreements between the IRS and a taxpayer to pay a certain debt. This debt is less than the actual amount owed, however, the amount is determined by the IRS. Unless special circumstances are present, the IRS will not accept an offer in compromise they believe can be paid in full through a payment agreement. Most of the time, the IRS will not accept an OIC unless it is equal to or greater than the reasonable collection potential (RCP). The RCP is the formula the IRS uses to determine how much the taxpayer can handle--factoring in assets, future income, and allowing room for basic ilving expenses. An application must be filed to be granted an OIC.
There are three types of Offers in Compromise taxpayers should be aware of:
Doubt as to Collectibility: This happens when the IRS believes the taxpayer will be unable to pay the debt within the amount of time allowed because there are no assets and income does not sufficiently cover living expenses. The taxpayer cannot pay the amount now or through monthly payments, and agrees the debt is true.
Doubt as to Liability: This happens when the IRS believes the taxpayer is not responsible for the tax debt. For example, if an employee has unpaid payroll taxes, but is able to prove he or she left the job prior to those taxes adding up, there is a doubt as to liability.
Effective Tax Administration: In this case, there is no speculation about whether or not the debt is true. The taxpayers have the means through assets and otherwise to pay the full debt, but have other circumstances preventing them from meeting the obligation. These taxpayers must prove to the IRS the debt repayment would create a hardship or be unfair. For instance, if a married couple has the means to pay the debt through equity in a home, but also is responsible for the sole care of a sick child, the equity in the home would then be necessary to cover medical bills and treatment for the child, rather than the tax debt.
