An offer in compromise (“OIC”) is a special agreement between a taxpayer and the IRS, which settles a taxpayer’s tax liabilities for less than the full amount owed. An OIC is one of the most beneficial tax debt resolution programs for taxpayers who can qualify. The OIC program is available for both individuals and businesses.
However, despite the proliferation of billboards, radio and online ads that imply the OIC is a common and reasonable solution for many people (“We can settle your IRS case for pennies on the dollar!!”), the reality is that few people qualify for this program. In fact, while more than 16 million people and 3 million businesses owe the IRS, only 25,000 resolved their tax debts using the OIC in 2018.
An OIC is based more in mathematics than “making a deal”. The numbers must show that the IRS’s reasonable collection potential is less than the tax owing so that it is in the IRS’s best interest to collect what it can right now and settle the debt once and for all.
Types of Offers on Compromise
There are actually three types of OICs:
- Doubt as to Collectability. This is the most common type of OIC. The IRS will accept a settlement if your assets and future income over the collection expiration statutes are less than the full amount of the tax liability.
- Doubt as to Liability. This kind of OIC ends up being very similar to a tax audit. The taxpayer must demonstrate there is a genuine dispute as to the existence or amount of the correct tax debt under the law.
- Effective Tax Administration. The rarest type of OIC is for situations when there is no doubt that the tax is legally owed and that the full amount owed can be collected, but requiring payment in full would either create an economic hardship or would be unfair and inequitable because of exceptional circumstances. Serious health issues are the type of circumstances that support an ETA OIC.
Application and Procedure
Applying for an OIC requires a careful financial analysis to determine if you qualify, a nonrefundable application fee of $186, submission of all the correct IRS forms, and a number of other financial documents to support your case, including bank statements, pay stubs, utility bills, medical records, and more.
Your application will be assigned to an Offer Examiner or Offer Specialist who will review your filing and payment compliance, and investigate your finances. The OIC Examiner is tasked with going in-depth into a taxpayer’s financial history, even looking into old transactions to see whether the taxpayer has tried to hide assets.
If the Examiner denies your OIC, you have the chance to appeal your case. Common issues that are appealed are:
- The method used to determine an average monthly income figure
- Asset values and dissipated assets
- Which expenses should be allowed as necessary living expenses
- Allowance of expenses above IRS-determined averages
In our experience, an Examiner works hard to find any reason to say “no” to your OIC, after which an appeal is necessary. However, because OICs are not the right option for many taxpayers, we always advise individuals against submitting an OIC before their case has been carefully reviewed by an experienced tax professional to see if they actually qualify for the program.
Once your OIC has been accepted, that is not the end of your case! The IRS will monitor your account for 5 more years to ensure you meet the terms of your settlement, and file and pay your tax returns on time.
After your OIC has been accepted, you may also qualify for special programs to address any tax liens that were filed against you under your debt.
Do States Have Offer in Compromise Programs?
Many (but not all!) state governments and their tax departments have some sort of tax debt settlement program. The rules and requirements behind these programs are very different from state to state.In Colorado, for example, you must first complete the IRS OIC program before the Colorado Department of Revenue will accept an application to settle your state tax debts.
The Law Offices of Daniel T. Goodwin’s tax resolution team has seen great success with getting OICs accepted for our clients. Our attorneys have collectively saved our clients hundreds of thousands of dollars in forgiven tax debt. Please contact us if you have a question about your tax case or need assistance with an OIC.