What is an IRS Offer in Compromise?

When a taxpayer cannot afford to pay his tax debt, the Internal Revenue Service (IRS) may grant him an offer in compromise (OIC) if he qualifies. This agreement lets the taxpayer settle his debt for less than he actually owes. They are, however, extremely difficult to obtain, especially in the wake of the Great Recession.

The budget crunch has had a profound effect on how the IRS operates. Since the federal government is in desperate need of money and the IRS is their only source of revenue, they have been asked to collect more and make fewer deals. According to the latest data, the IRS accepted just 15 percent of the Offers in Compromise they received, down from 25 percent last year. Of course, this does not mean that people should stop applying for them. But there are a few things they should know before they do.

Where to start?

As a general rule, the IRS will not even entertain an offer unless they believe you cannot pay your back taxes, either in one lump sum or through a payment plan for taxes or by selling something you own to satisfy the debt. Nor will they make any altruistic deals just so they can collect something. In most cases, the agency will only agree to an OIC if the amount is greater than or equal to what they believe you can pay. The IRS calls this measurement the reasonable collection potential (RCP). To determine it, the IRS will add up the value of all your real property, bank accounts, and future income. If the number is higher than the IRS offer in compromise, they will not do the deal.

With that said, there is still a good chance that an offer will be accepted if you truly cannot afford to pay your back taxes. When the IRS doubts that a taxpayer could ever afford his total tax liability, they often approve an offer in compromise. For example, if you owe $10,000 in back taxes and you are making minimum wage and can barely pay your monthly bills, the IRS will have no other choice but to accept the offer.

How can a tax advisor help?

As we have seen, convincing the IRS that you cannot meet your tax burden isn’t easy. The feared federal agency will only accept an OIC as a last resort. That means you must prove that you cannot afford to pay your back taxes all at once or in installments. With a professional tax advisor at your side, the odds of obtaining an IRS offer in compromise increase dramatically.

It is, however, important to note that taxpayers should steer clear of tax advisors who promise that tax debts can be settled for pennies on the dollar with an OIC. While this may be the cse for some taxpayers, it is not true for anyone who applies for an OIC. When the IRS accepts an offer, they expect regular installment payments. Your total tax bill may be reduced to pennies on the dollar, but you will still be obligated to repay those pennies in a timely manner.

A talented tax advisor may be able to arrange a favorable IRS offer in compromise settlement for you if you qualify and you cannot afford to pay your tax debt.

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