An offer in compromise (OIC) is an agreement between a taxpayer and the Internal Revenue Service (IRS) that settles the taxpayer's tax liabilities for less than the full amo
unt owed. Absent special circumstances, an offer will not be accepted if the IRS believes that theliability can be paid in full as a lump sum or through an installment agreement.
In most cases, the IRS will not accept an OIC unless the amount offered by the taxpayer is equal to or greater than the reasonable collection potential (RCP). The RCP is how the IRS measures the taxpayer's ability to pay and includes the value that can be realized from the taxpayer's assets,such as real property, automobiles, bank accounts, and other property. The RCP also includes anticipated future income, less certain amounts allowed for basic living expenses.
1. Doubt as to Collectibility Doubt exists that the taxpayer could ever pay the full amount of tax liability owed within the remainder of the statutory period for collection.
Example: A taxpayer owes $20,000 for unpaid tax liabilities and agrees that the tax she owes is correct. The taxpayer'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.
2. Doubt as to Liability - A legitimate doubt exists that the assessed tax liability is correct. Possible reasons to submit a doubt as to liability offer include: (1) the examiner made a mistake interpreting the law, (2) the examiner failed to consider the taxpayer's evidence or (3) the taxpayer has new evidence.
Example: The taxpayer was vice president of a corporation from 2004-2005. In 2006, the corporation accrued unpaid payroll taxes and the taxpayer was assessed a trust fund recovery penalty as a responsible party of the corporation. The taxpayer was no longer a corporate officer and had resigned from the corporation on 12/31/2005. Since the taxpayer had resigned prior to the payroll taxes accruing and was not contacted prior to the assessment, there is legitimate doubt that the assessed tax liability is correct.
3. Exceptional Circumstances (Effective Tax Administration) 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. To be eligible for compromise on this basis, a taxpayer must demonstrate that the collection of the tax would create an economic hardship or would be unfair and inequitable.
Example: Mr. & Mrs. Taxpayer have assets sufficient 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.
In general, a taxpayer must submit a $150 application fee and initial payment along with the Form 656, Offer in Compromise. Taxpayers may choose between two payment options to pay their accepted offer in compromise:
1. Payment Option 1 - Payable in non-refundable installments, the offer amount must be paid in five or fewer installments upon written notice of acceptance. A non-refundable payment of 20 percent of the offer amount along with the $150 application fee is due upon filing the Form 656.
2. Payment Option 2 - Payable in non-refundable installments and in more than five months. The first payment and the $150 application fee are due upon filing the Form 656. Regular payments must be made during the offer investigation.
The IRS is not bound by either the offer amount or the terms proposed by the taxpayer. The OIC investigator may negotiate a different offer amount and terms, when appropriate. The investigator may determine that the proposed offer amount is too low or the payment terms are too protracted to recommend acceptance. In this situation, the OIC investigator may advise the taxpayer as to what larger amount or different terms would likely be recommended for acceptance.
When filing an OIC, two separate remittance documents should be sent, one for the application fee and the other for the required offer payment. All payments should be made by check or money order made payable to the United States Treasury. Practitioners who file multiple OICs at the same time should not combine application fees for multiple clients.
Failure to submit any required periodic payments, after the initial payment has been submitted, will result in the offer being declared withdrawn.
Exception: Taxpayers submitting an OIC for an individual and meeting the Low Income Certification guidelines (see page 2 of Form 656, Offer in Compromise), will not be required to send the $150.00 application fee, the initial payment, or make any periodic payments during the evaluation of their offer.
The OIC application fee reduces the assessed tax or other amounts due. The application fee will be returned if the OIC is deemed not to be processable. Unless the offer in compromise has been submitted under doubt as to liability or the offer is submitted by an individual meeting Low Income Certification guidelines on the Form 656, the $150 application fee must be included with the offer or the IRS will return the offer.