Do You Qualify for an Offer in Compromise?

What is the Internal Revenue Service’s Offer In Compromise (OIC) program, and what does it take to qualify for this relief?

This IRS program allows someone who owes federal taxes to pay less than the full amount that’s due, provided that certain conditions are met. The Offer in Compromise program reviews the best interests of both parties – the IRS and the taxpayer – and the taxpayer must voluntarily comply with filing requirements and promised payments. The program specifically assists taxpayers who cannot pay in any of the following ways:

  • Via a lump sum
  • Via a payment plan or
  • Via other types of payment arrangements.

The OIC reduces the balance owed through an agreement with the taxpayer. However, the IRS only accepts these agreements if it thinks the taxpayer cannot pay the amount due in full. It’s a “compromise” position – the IRS would rather get something than nothing.

The IRS also considers reasonable collection potential (RCP) before accepting such an offer. The agency uses a specific formula to calculate RCP that looks at the taxpayer’s assets, potential future earnings, and other factors. As a result of these strict guidelines, the IRS generally accepts less than 25 percent of the offers the agency receives.

The agency bases its decision on the following factors:

  • The IRS’s ability to collect the full amount of taxes owed in the time period allowed
  • Doubt regarding the amount owed by the taxpayer due to mistakes or new evidence and
  • Exceptional circumstances that would mean an economic hardship for the taxpayer.

In addition, as a taxpayer, you must meet the following requirements:

  • You cannot have an open bankruptcy case
  • You must have filed all tax returns
  • Any tax payments must be current
  • A $150 application fee or a signed IRS fee waiver needs to be submitted with your application
  • You must submit one of the following payments at the time of the offer
  • A lump sum offer – You must submit 20 percent of the payment and be able to pay the balance in a maximum of five payments after the IRS accepts the offer.
  • Short-term periodic payment offer – You need to submit an initial payment with the offer and make the payments as scheduled until the IRS makes a decision on your offer and pay the full amount within two years.
  • Deferred periodic payment offer – You must make an initial payment with the offer and make regular payments over the statutory period when the IRS can collect the taxes.
  • An ETA offer is an Effective Tax Administration Offer whereby a taxpayer may have the assets to full pay the tax debt but fully doing so would create a hardship

The IRS has no obligation to accept any offer, and the IRS investigator might submit a different amount concerning terms of collection. You may also have the right to appeal any IRS decision.

Call the qualified tax professionals at Highland Tax Group to assess your financial situation and determine whether and how to apply for an OIC. Call 720-398-6088 for a complete financial analysis.