IRS Offers in Compromise

The Internal Revenue Service Offer in Compromise (OIC) program allows taxpayers to settle a tax liability for less than the full amount owed. The IRS will often accept an offer when the amount it reasonably expects to collect from a taxpayer’s equity in assets and disposable monthly income is less than the amount owed. The determination of the amount a taxpayer can pay is referred to as the reasonable collection potential (RCP). The IRS will not however consider an offer unless the taxpayer is fully compliant with the IRS’s filing requirements and is not currently in bankruptcy.

The IRS may also accept an OIC on two other grounds. First, acceptance is permitted if there is doubt as to liability when genuine doubt exists that the IRS has correctly determined the amount owed. Second, an offer may be accepted based on effective tax administration when there is no doubt that the full amount owed can be collected, but requiring payment in full would either create an economic hardship or would be unfair because of exceptional circumstances.

In order to determine a taxpayer’s RCP, the taxpayer must provide the IRS with a statement of financial information, either the IRS Form 433-A for individuals or self-employed taxpayers or the IRS Form 433-B for business taxpayers. The taxpayer is generally required to include supporting documentation such as recent bank statements, monthly expense receipts, among other items.

If an offer is accepted, the taxpayer must remain in compliance with all filing and payment requirements for the next five years or else forfeit the entire offer and the original liability will be reinstated. Taxpayers may choose to pay the offer amount in a lump sum or in installment payments. A lump sum offer is defined as an offer payable in 5 or fewer installments. If a taxpayer submits a lump sum offer, the taxpayer must include with the offer a nonrefundable payment equal to 20 percent of the offer amount. A periodic payment may be paid over the course of a number of years, subject to approval by the IRS.

If the OIC is rejected, the taxpayer has a variety of alternatives available. For example, the taxpayer can appeal to the IRS Appeals Office and the United States Tax Court, or seek an alternative collection remedy, either an installment agreement or being classified as Currently Not Collectible.

The OIC program is an excellent resource for qualifying taxpayers to reduce their overall liability. Those interested in exploring this opportunity should contact a tax attorney for a detailed analysis on the feasibility of requesting a compromise.

We welcome you to contact Ortiz & Gosalia with regard to your tax matter and the IRS Offer in Compromise program. Call us at (425) 633-2004, send an email to info@ortizgosalia.com, or use our online form. With Seattle area offices in Redmond, Bellevue and Kirkland, we serve clients throughout Washington State as well as those located internationally or in other U.S. states.