Is an offer in compromise right for me?

Offers in compromise get a lot of attention from promoters. It is often touted as a quick way to erase your IRS debt. Is there any truth to these claims? Read on to learn more about what offers in compromise are really about.

What is an offer in compromise?

An offer in compromise (OIC) is an agreement between the IRS and a taxpayer regarding an outstanding tax liability. An offer is made by the taxpayer to the IRS, “I promise to pay a portion of the outstanding balance, and I will stay in compliance from now on.” Both parties end up compromising. The government’s compromise is to take a smaller amount, while the taxpayer promises to pay according to a schedule and keep up with the taxes going forward.

There are three types of offers available. The most common is when the taxpayer cannot pay the full amount, also known as a “doubt as to collectability” offer. The IRS considers the taxpayer’s income, assets, expenses, and related information extrapolated over a period to determine if the taxpayer will be able to repay the debt.

There is a second type that focuses less on if the taxpayer can pay but whether it would make for good policy to make them do so. These offers consider whether paying the liability would be unfair or create an economic hardship for the taxpayer. Often these offers rely on invoking public policy to show that the liability should be reduced.

The third type, called “doubt as to liability,” considers whether the liability is accurate. If the taxpayer has not had a chance to contest the liability, such as during an audit, then this type of offer may provide an opportunity. However, this is not a free pass to relitigate an issue that has already been examined.

What is an OIC not?

Despite the popular advertising around this program, it is not a magic wand that you can wave and reduce any amount of tax liability to mere pennies or even walk away from paying anything. The government still has to agree to the offer and will reject it unless there is a good reason provided. It is on the taxpayer to prove that the offer makes sense for the government to accept. Many offers are rejected. This can be from choosing the wrong offer type, not providing the right information, or not convincing the IRS agent reviewing the offer that it is a good deal.

Is an OIC right for me?

There is no easy answer to this question. Not only are there multiple types of offers that must be considered, but also your specific circumstances. How much do you currently owe? Have you filed tax returns for the last six years? What do your income and assets look like compared to your disposable income? Do you have any unusual circumstances that would make it more likely?

Again, an offer in compromise is not a magic bullet. But it can be a useful tool to help you deal with tax debt. If you have a large tax debt, you should talk to a professional that will help you evaluate whether an offer is the right tool and look at other possible options with you. We will explore other possible options in future posts.

If you have questions or would like to discuss your situation, you can contact us to set up a time.