When Should a Taxpayer Make an IRS Offer in Compromise (OIC)?

When Should a Taxpayer Make an IRS Offer in Compromise (OIC)?
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What is an Offer in Compromise

Imagine you owe the Internal Revenue Service (IRS) a large sum of money, but you know you will never be able to pay your full debt. What can you do?

In some cases, you may be able to pursue a compromise with the government which will allow you to pay less than the full amount you owe. The IRS calls such an agreement an offer of compromise (OIC). It will not accept such an agreement unless certain criteria apply. This article will describe the circumstances in which the IRS will accept an offer in compromise.

It actually is possible in some cases to negotiate with the IRS personally, if one owes more than can be paid.

What If the Full Amount Owed Cannot Be Collected

The IRS calls it the Doubt as to Collectability. If the government and the taxpayer both agree a certain amount of money is owed but there is a doubt the taxpayer could pay the full amount owed, the IRS may accept a compromise.

If a taxpayer cannot pay all of a bill because his or her income does not adequately pay for all living expenses and leave enough money to pay his tax bill, the government might accept a compromise. If on the other hand, the taxpayer owns real estate which could be sold to generate money to pay the bill, the IRS would be less likely to accept a compromise, even if he cannot afford to make monthly payments toward his debt.

Doubt About Liability for the Tax Bill

The IRS might accept an OIC if there is a legitimate doubt as to whether the taxpayer truly owes the amount of tax in question. Such a doubt could arise if the tax examiner made a mistake in interpreting the law when examining an individual tax return. There could also be a legitimate doubt if a taxpayer has new evidence to present or some of his evidence was never considered.

For example, if a corporate officer, such as a vice president, resigned the year before a company was assessed for unpaid payroll taxes and a trust fund recovery penalty there could be a legitimate doubt as to whether that former officer owes any taxes for his role with the company. This could be true even if he resigned the last day of a year and the company was assessed the taxes the very next year.

Effective Tax Administration or an Exception Circumstance for the Taxpayer

The government might accept a compromise even if there is no doubt the tax is owed and there is a potential it could fully be repaid, but there is an exceptional circumstance affecting the taxpayer. To be eligible for such a compromise, the taxpayer could demonstrate he or she would suffer an economic hardship by paying the tax. He could also show paying the tax would be unfair.

The IRS might accept an OIC if a taxpayer had unusually high medical expenses for a son or daughter. Even if the taxpayer could possibly pay the bill, the government might accept a compromise.

Reasonable Collection Potential

The government will generally not accept an offer in compromise unless the IRS believes the amount offered is equal to or greater what it could receive from the taxpayer without the compromise. The government calls it the Reasonable Collection Potential (RCP). When the IRS calculates the RCP, representatives consider such things as the taxpayer’s ability to pay and generate additional funds from such assets as cars, real estate, bank accounts, and other property. Future income is also considered.

Payment Options with an OIC

If the IRS does accept your compromise, the government will give you three options to pay the money.

One option will be the lump sum payment, although this does not actually mean the whole payment must be made at once. When a taxpayer receives a written notice of acceptance of the OIC, he or she must pay the $150 application fee plus at least 20 percent of what was offered. The 20 percent cannot be refunded. The remaining money must be made in four or less additional payments of from five months or less up to more than two years. The taxpayer must also list the value of his assets.

Individuals can also pay off the money by a short term periodic payment plan. This is paid in installments within 24 months of when the IRS received the offer. In addition, he or she must include the realizable value of assets the IRS could collect over 60 months of payments, mentioning the total amount which could be collected.

Finally, individuals may offer a deferred periodic payment plan. The $150 application fee must be paid, as with all options, and regular payments must be made during the payment term. The IRS may accept he terms under this option, or the OIC Investigator may negotiate different terms, with larger payments, or a shorter payment term.

How to File an OIC with the IRS

To file an OIC with the IRS, one can go to the IRS website, which contains filing instructions and a link to the proper form. There is a link to the form for when one is asking for a compromise for other reasons, and a separate link to the form one should use when he or she is claiming there is a doubt as to whether the taxpayer owes as much or any of the amount the government claims.

The site also tells where to mail the completed form based on which state the taxpayer lives in. The site gives detailed instructions and lists additional links for more information about such offers, such as the fact that such offers are not refundable and that the IRS will keep any money owed for overpayments extending through the year the government accepted the compromise.

An OIC Can Save You Money

USCurrency Federal Reserve

Here we have attempted to answer the question of when you should pursue an IRS offer in compromise and make an offer. While the reasons the government accepts such compromises have been listed, individuals won’t actually know if the IRS will accept the offer until they pursue the issue. However, if the offer is accepted, they will no doubt save money.

It is important to set up a payment plan with the IRS (if one is accepted) because without such an agreement, a taxpayer can end up owing a penalty of 5 percent per month until the penalty reaches 25 percent of the original money owed.

Image Credit: Shake hand by Lucas under Public Domain

Image Credit: USCurrency Federal Reserve by J.J. under Public Domain

Author unknown, “What is an Offer in Compromise?,” https://www.irs.gov/businesses/small/article/0,,id=104593,00.html

Author unknown, “How to File an Offer in Compromise,“https://www.irs.gov/businesses/small/article/0,,id=180960,00.html