IRS: What is an Offer-in-Compromise?

Handshake on IRS Offer-in-Compromise acceptance.
Photo courtesy of Charles E. Hammond III, Esq.

An Offer-in-Compromise (OIC) is authorized by the Internal Revenue Code § 7122 , which allows for an agreement between a taxpayer and the Internal Revenue Service that settles the taxpayer’s tax liabilities for less than the full amount due. Generally speaking, an offer will not be accepted if the IRS believes that the liability can be paid in full as a lump sum or through some sort of payment agreement, such as in installment payments

There is no validity to some dubious promoters’ claims that tax debts can easily be settled for pennies on the dollar. Taxpayers should be wary of these claims and especially circumspect of those making such claims; however, the IRS does have the discretion to reduce or eliminate penalties and fees. A tax professional can be dedicated to negotiating installment agreements to pay off tax liabilities and have penalties reduced or even removed.

The amount offered by the taxpayer generally must be equal to or greater than the reasonable collection potential (RCP) to be acceptable to the IRS as an Offer-in-Compromise. The IRS utilizes the RCP to measure the taxpayer’s ability to pay, and includes in that amount all the value that can be liquidated from the taxpayer’s assets, for example, a taxpayer’s real property, automobile(s), bank account(s), and any other valuable chattel. The RCP includes also anticipated income minus certain basic living expenses.

There are three bases for submitting an Offer-in-Compromise: 1) Doubt as to collectability; 2) Doubt as to liability; and 3) Effective tax administration. (Taxpayers can read more about the three different options at the IRS Web-site here.)

The purpose of this program is to settle tax debts for the maximum amount allowable under a particular taxpayer’s ability to pay, including from his current net worth and future income potential. The latter will depend on qualities such as age, employability, education, and how much time is left on the 10-year statute of limitations for collection.

A tax professional is always strongly recommended for coming into compliance with complicated US tax laws. This is an educated, erudite individual that can advocate on your behalf with the IRS, and can negotiate based on experience, thereby minimizing penalties and obligations for the taxpayer.

Questions or comments? Email the author at sami.hartsfield@protaxcounsel.com.

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For more info:
Offers-in-Compromise (from the Tax Law Group, LLC)

(IRS) What you must know before you file an Offer-in-compromise
(IRS) How to file an Offer-in-Compromise