What is an Offer in Compromise?
An offer in compromise is an agreement between the taxpayer and the IRS that settles the taxpayer’s tax bill for LESS than the full amount owed. This program can be life changing for taxpayers whose financial situation makes it nearly impossible to pay their entire tax debt.
How does the Offer in Compromise program work?
To qualify for this program, you must show the IRS that there is no possible way that you can pay your entire tax debt, because you don’t have enough income or assets to cover the full amount. Instead, you will offer to pay the IRS the maximum amount you can afford (even though it may be much less than the amount you actually owe).
Once your offer is submitted, the IRS will review it, and will accept it, if they agree that the amount you offered is the most that they can reasonably expect to collect from you. In this case, the IRS will agree to the offer, and will decrease your tax debt to match the amount you can pay.
At this point your entire tax bill will be settled for the years covered by the offer in compromise, including all penalties and interest.
Who qualifies for an Offer In Compromise?
Not surprisingly, the actual acceptance rate for an offer is fairly low because not everyone with tax debt qualifies for this program and because of errors or omissions made on offer submissions. In order to have the greatest chance of approval a taxpayer should seek professional help during this very complex process.
What are the criteria for an Offer in Compromise?
The IRS will consider compromising your tax debt for one of the following three reasons:
Offer Type 1: Doubt as to Liability:
The Basics- You do not believe that the amount of back taxes owed are correct. There was an error made. The IRS, your accountant, or you may have made the error. If the error is corrected, your tax bill will be lower. Offer in Compromise Doubt as to Liability is filed to correct the error and reduce the taxes owed.
Example: Joe taxpayer was vice president of a corporation from 2004-2005. In 2006, the corporation built up unpaid payroll taxes and the taxpayer was assessed a trust fund recovery penalty as a responsible party of the corporation. However, Joe resigned from the corporation on 12/31/2005 and was no longer a corporate officer. Since Joe resigned prior to the payroll taxes accumulating, and he wasn’t contacted before the tax assessment, there is legitimate doubt that Joe’s assessed tax liability is correct.
Offer Type 2: Doubt as to Collectability:
The Basics: You owe back taxes to the IRS, but you can’t afford to pay your tax debt. The IRS may agree to settle your tax debt for less than you owe. This process is called Offer in Compromise Doubt as to Collectability.
In this case, doubt exists that you could ever pay the full amount of tax liability owed within the remainder of the statutory period for collection, because your assets and income are less than the full amount of your tax liability.
Example: Jane taxpayer owes $20,000 for unpaid tax liabilities and agrees that the tax she owes is correct. Jane’s monthly income does not meet her necessary living expenses. She does not own any real property and does not have the ability to fully pay the liability now or through monthly installment payments.
Offer Type 3: Effective Tax Administration:
The Basics: There is no doubt that the tax is correct and there is potential to collect the full amount of the tax owed, but an exceptional circumstance exists that would allow the IRS to consider an OIC.
Two Types of Effective Tax Administration Offer in Compromises.
Type 1 is based on hardship. – To be eligible for compromise on this basis, a taxpayer must demonstrate that the collection of the tax would create an economic hardship
Type 2 is based on equity or public policy- To be eligible for compromise on this basis, a taxpayer must demonstrate that the collection of the tax would be unfair and inequitable.
Example: Mr. & Mrs. Taxpayer have sufficient assets to satisfy the tax liability and provide full time care and assistance to a dependent child, who has a serious long-term illness. It is expected that Mr. and Mrs. Taxpayer will need to use the equity in assets to provide for adequate basic living expenses and medical care for the child. There is no doubt that the tax is correct.
Every tax case is different, but EVERY case has a solution. We can help you figure out the best program to settle your tax debt, click below for a free consultation.
The IRS will not forget about you or your tax debt, it will only increase the pressure to collect! The Offer in Compromise Program may be the best option to settle your tax debt, but if you don’t qualify there are other options as well, such as installment agreements, CNC or penalty abatement.