What is an Offer in Compromise?

An offer in compromise (OIC) is an agreement between a taxpayer and the Internal Revenue Service (IRS) that allows the taxpayer to settle their tax debt for less than the full amount owed. It can be a legitimate option for those who cannot pay their full tax liability or for whom doing so would create financial hardship.

Table of Contents

Types of Offers in Compromise

Eligibility Requirements

Application Process

How the IRS Evaluates Offers

Payment Options

Advantages and Disadvantages

Alternatives to Offers in Compromise

Getting Help

Conclusion

Types of Offers in Compromise

There are three main types of offers in compromise:

1. Doubt as to Collectibility: This is the most common type of OIC. It applies when the taxpayer doesn't have sufficient assets or income to pay the full tax debt before the collection statute expires (generally 10 years from the assessment date). In other words, the type of OIC applies when a taxpayer cannot afford to pay the full amount of the tax.

2. Doubt as to Liability: This type of OIC is used when there is a genuine dispute about the existence or amount of the correct tax debt. The taxpayer must submit documentation supporting their position, but not the usual Form 433-A (OIC) required in other types of OICs.

3. Effective Tax Administration: If paying the full tax debt would create an economic hardship or would be unfair and inequitable due to exceptional circumstances, even though the tax is correct and the taxpayer has sufficient assets to pay, an OIC based on effective tax administration may be accepted.

TIP: Many OICs that are accepted have elements of economic hardship or exceptional circumstances involved. A determination of whether the OIC is likely to be accepted is complex and would require the assistance of an experienced tax professional.

Eligibility Requirements

To be eligible for an offer in compromise, the taxpayer must:

• File all legally required tax returns

• Make all required estimated tax payments for the current year

• Make all required federal tax deposits for the current quarter (if the taxpayer is a business owner with employees)

• Not be in an open bankruptcy proceeding

Application Process

Applying for an offer in compromise involves:

1. Completing IRS Form 656: This form requires detailed financial information about the taxpayer's assets, income, expenses, and debt.

2. Paying an application fee: There is a $205 non-refundable fee, which may be waived for low-income applicants.

3. Making an initial payment: The taxpayer must make an initial non-refundable payment, the amount of which depends on whether they are proposing a lump sum or periodic payment offer.

4. Providing supporting documentation: The taxpayer must submit documentation backing up the financial information provided on Form 433-A (OIC).

Once the application is submitted, the IRS will suspend collection activities while it evaluates the offer. The IRS may file a Notice of Federal Tax Lien to protect its interests during this time.

How the IRS Evaluates Offers

The IRS calculates a taxpayer's reasonable collection potential (RCP) based on their assets, income, expenses, and other financial information to determine their ability to pay. The RCP is compared to the offer amount - generally, the IRS will not accept an offer that is less than the RCP. Factors that influence whether an offer will be accepted include:

• The taxpayer's unique circumstances and financial situation

• The amount of the tax debt

• The taxpayer's past compliance history

• The potential for the tax debt to be collected in full

TIP: The IRS will accept an offer where RCP is less that the tax liability, if the taxpayer is involved with a financial hardship or has exceptional circumstance. These matters are complex and beyond the scope of this paper.

Payment Options

If an offer in compromise is accepted, the taxpayer can choose to pay the settled amount in one of two ways:

1. Lump Sum Cash: The offer amount is paid in five or fewer installments within five months of acceptance.

2. Periodic Payment: The offer amount is paid in monthly installments within 6 to 24 months.

Taxpayers are required to stay current with all tax filing and payment obligations during the payment period or risk default. After an OIC is accepted, all returns must be filed timely, and all estimated tax payments, if any, must be made timely for five years.

Advantages and Disadvantages

Offers in compromise can provide a "fresh start" for taxpayers who qualify, allowing them to settle their tax debts for less than the full amount owed. It can be a good option when paying the full amount would be impossible or create economic hardship. However, offers in compromise are not easily obtained. The process is complex, requiring extensive financial disclosure and documentation. Fees are generally non-refundable, even if the offer is not accepted. Some information about accepted offers, including the taxpayer's name, city, state, zip code, liability amount, and offer terms may be made publicly available by the IRS.

Alternatives to Offers in Compromise

If a taxpayer doesn't qualify for an offer in compromise or their offer is rejected, other options for resolving tax debt include:

• Installment agreements to pay the debt over time

• Temporary delay of collection action if the debt is currently not collectible due to financial hardship

• Penalty abatement if failure to file or pay was due to reasonable cause and not willful neglect

• Bankruptcy may also provide relief from certain tax debts.

TIP: The Partial Payment Installment Agreement program, where the full amount of the monthly installment payments need not be paid, but only the monthly amount the taxpayer can afford needs to be paid. After the last monthly payment is made the remaining tax debt is written off by the IRS. If an OIC is rejected, this is a great worse case scenario. Under both programs the taxpayer must be in an economic hardship.

Getting Help

When facing the complexities of an offer in compromise, it is crucial to seek guidance from a seasoned tax professional. At our firm, we recommend working with Tom Dilullo, an Attorney-CPA with a unique skill set that combines legal and financial expertise. Tom's dual qualification allows him to provide comprehensive assistance in assessing your situation, determining the appropriate offer amount, managing paperwork, gathering necessary documents, and negotiating effectively on your behalf.

Why Choose Tom Dilullo, Attorney-CPA?

- Expertise in both legal and financial matters

- Ability to handle complex tax issues with precision

- Dedicated to ensuring clients receive fair and favorable outcomes

By partnering with Thomas Dilullo, you can rest assured that your offer in compromise process will be handled with professionalism and efficiency, avoiding the pitfalls associated with unreliable "tax relief" companies. Tom's commitment to delivering top-notch service and his Attorney-CPA designation set him apart as a trusted advisor in navigating IRS negotiations.

Conclusion

An offer in compromise can be a valuable tool for taxpayers who cannot pay their full tax debt, and need a fresh start. The eligibility criteria are strict, the application process is complex, and perseverance is necessary. Taxpayers considering an offer in compromise should carefully weigh their options and seek professional guidance to ensure it is the right choice for their unique situation.