Offers In Compromise

Keeping in mind that the ultimate objective of the IRS is to collect the amount owed in taxes, it is usually possible for taxpayers with no apparent means to pay their tax liability to negotiate a settlement with the IRS.  Under such circumstances taxpayers can tender an offer to pay the IRS a lump-sum payment to fully settle their tax liability. Such negotiation is known as an "Offer in Compromise".

If taxpayers are unable to pay a tax debt in full , and an installment agreement is also not an option, then they may be able to take advantage of the offer in compromise (OIC) program.  Generally, the OIC program should be viewed as a last resort after taxpayers have explored all other available payment options.  The IRS resolves less than 1 percent of all balance due accounts through the OIC program.

What is an Offer in Compromise?

An offer in compromise is an agreement between a taxpayer and the IRS that resolves the taxpayer's tax debt. The IRS has the authority to settle, or “compromise,” federal tax liabilities by accepting less than full payment under certain circumstances.  A tax debt can be legally compromised for one of the following reasons:

• Doubt as to Liability - Doubt exists that the assessed tax is correct.
• Doubt as to Collectibility - Doubt exists that you could ever pay the full amount of tax owed.
• Effective Tax Administration - There is no doubt the tax is correct and no doubt that the amount owed could be collected, but an exceptional circumstance exists that allows the IRS to consider a taxpayer’s OIC. To be eligible for a compromise on this basis, the taxpayer must demonstrate that collection of the tax would create an economic hardship or would be unfair and inequitable

In order to offer in compromise to be considered by the IRS, taxpayers must meet all the following requirement - See the IRS policy on OIC

1. File all require tax return
2. Is not involved in bankruptcy proceeding, and
3. If in business , must have filed and paid all employment tax returns on time for the two quarters prior to filing the OIC and be current for the quarter in which the offer in compromise was submitted

Doubt about taxpayer’s ability to ever-pay the full amount of taxes owed depends on:

• Taxpayer income compared to the National Standards
• The amount of cash or equity maintained in saving, retirement, and investment accounts.
• The amount of equity taxpayers may have in assets he/she may own. Such assets include residence, automobiles, business interest

How the National Standards relates to Offer in Compromise

The amount of taxpayer(s) income in excess of National Standards is considered as an amount available to pay tax liability under an installment agreement.  The excess amount of income is to be reduced by debt other than that owed to the IRS, such as credit cards debt, medical bills, and other secure or non-secured liabilities. See national standards and the standards applies to Texas residents

What is the dollar amount of an acceptable offer?

There is no standard minimum amount that the IRS would accept. In some cases the IRS may accept as little as 9% of the total amount owed and they may rejected as much as 50% of the total amount owed. The work of tax accounting professional in this situation is extremely important, since the IRS will examine and consider the taxpayers' financial position, their equity in assets, and  their ability to pay, and, accordingly, determine what would be an acceptable offer. 

It is important to note that "Offer in Compromise" is neither intended nor can be used when the taxpayer is capable of paying the amount owed to the government. The use of this feature in the tax law is intended to enhance the tax collection efforts. 

If a taxpayer's offer in compromise is accepted and the amount of the offer is fully paid, all the past tax liability would be eliminated and all tax liens will be released.

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Last modified: February 19, 2007