Table of Contents

What is an Offer in Compromise?

How and Why would the IRS accept less than the full amount of taxes owned?

How is reasonable collection potential determined?

The shocking truth about equity in your home or business

Remember to take the 20% discount for assets

Wait! Even if you can pay the tax in full you may still qualify

Look how easy these requirements are

Beware of the IRS Offer in Compromise Pre-Qualifier

Surprise! You can afford an Offer in Compromise!

Payment options

You will have a continuing duty after acceptance

Expert Tips

What is an Offer in Compromise?

An offer in compromise (OIC) is an agreement between a taxpayer and the Internal Revenue Service that settles a taxpayer's tax liabilities for less than the full amount owed. 

How and Why would the IRS accept less than the full amount of taxes owned?

Congress passed a law requiring the IRS to have a program to assist taxpayers when it is unlikely that the tax liability can be collected in full.

If you do not have the ability to pay the full amount of the tax, the IRS will accept an amount offered that is equal to or greater than the reasonable collection potential (RCP). The RCP is how the IRS measures the taxpayer's ability to pay.

How is reasonable collection potential determined?

The RCP includes the value that can be realized from the taxpayers assets, such as real property, automobiles, bank accounts, and other property. In addition to property, the RCP also includes anticipated future income less certain amounts allowed for basic living expenses.

The shocking truth about equity in your home or business

There are several exceptions which will allow you to qualify even if you have equity in your home.

1. Under certain conditions, if you cannot borrow against and if selling your home would create an economic hardship, you may still quality.

2. A portion of the equity of jointly owned property may be excluded from reasonable collection potential.

3. There are many rules and nuances about valuation of businesses, which will determine acceptability. Equity in assets is only used to determine the amount you must offer, but you don’t need to actually sell the assets. After this amount is determined, if you wish you can take a loan from family or friends to pay the IRS and keep the assets.

Remember to take the 20% discount for assets.

The value of assets is determined by using what IRS calls “quick sale value” (QSV), which is an estimate of the price a seller could get for the asset in a situation where financial pressures motivate the owner to sell in a short period of time, usually 90 calendar days or less.

1. QSV is usually calculated at 80 percent of the fair market value.

2. A higher discount may be applied if the value chosen represents a fair estimate of the price a seller could get for the asset (in a situation where the asset must be sold quickly, usually 90 calendar days or less). In this case, an independent appraisal would be required.

3. Use Form 433-A (OIC) to determine RCP, but remember there are a lot of exceptions and nuances.

Wait! Even if you can pay the tax in full you may still qualify.

You may still qualify even if you can full pay the tax liability under certain circumstances. A few years ago, congress directed the IRS to consider offer in compromises where the ability to pay exceeds the amount of the tax liability but there are special circumstances, such as an illness. In such a case, acceptance of the OIC for less than reasonable collection potential (or ability to pay) would be justified.

This type of offer in compromise is called an Effective Tax Administrative offer (ETA offer).

Look how easy these requirements are.

• All tax returns must be filed.

• All required estimated tax payments for the current year must be made.

• A business with employees must be current with federal tax deposits for the current and two preceding quarters.

• File Form 656 and pay the application fee.

  
  

Beware of the IRS Offer in Compromise Pre-Qualifier.

1. Why? Because in many instances the Pre-Qualifier will not provide an accurate result informing you that you do not qualify when you in fact do.

2. This is because there are many exceptions to the usual rules RCP apply, which are not included in the Pre-Qualifier's programing. These exceptions are frequently the deciding factors of whether one would qualify.

3. For example, the pre-qualifier does not take into account deviations from standard allowable expenses. Deviations are allowable if the table limits are insufficient for you to pay your basic living expenses.

4. If you own a primary residence jointly with your spouse, under certain circumstances you could exclude 50% of the amount that could be realized from that asset.

5. If the home is held as tenancies by the entirety when the tax is owed by only one spouse, the taxpayers portion is usally 50% of the equity. The taxpayer's portion may be reduced to less than 50% based on the difficulty in liquidating or borrwing against the taxpayer's share of the asset.

   
   

Surprise! You can afford an Offer in Compromise!

You can in fact, afford to pay an OIC, because you are only required to pay what you can afford (or have the ability to pay, called RCP), and nothing more.

Payment options.

The amount calculated as your ability to pay can be paid as either:

1. Lump-sum offer which must be paid within five months of the offer acceptance. In a lump sum offer, twenty percent (20%) of the amount offered must be paid with the application.

2. Periodic payment offer which must be paid within six to 24 months.

   In a periodic payment offer, an initial periodic payment installment must be paid with the application and subsequent periodic payments must be made throughout the period the OIC is pending based on ability to pay.

   
   

You will have a continuing duty after acceptance.

You must remain current by filing future tax returns and paying taxes timely for five years after the date of acceptance of the offer.

Expert Tips

• Offer in Compromises are a viable option to resolve your tax liability without full payment depending on the unique facts and circumstances present in your financial life.

• There are many special circumstances that will qualify you even when it appears in the first instance that you do not qualify.

• It is a misnomer that if you have equity in an asset, such as your home or business, that you will not qualify for an offer, because you may be able to exclude that equity from RCP to prevent an economic hardship.

• Even if you can pay the tax in full you may still qualify in special circumstances.

• Many Offer in Compromises that are accepted fall within the exceptions noted above.