You are facing the reality that you cannot pay the tax debt you owe to the IRS, and you’ve heard about the IRS Effective Tax Administration (ETA) Offer in Compromise (OIC)—a taxpayer completes this form to describe their financial circumstances and propose a change to the amount they owe or the payment terms. But do you even qualify to submit an OIC, and what is the likelihood it will be accepted?

Before You Begin an Offer in Compromise

These issues will automatically disqualify you from applying for an OIC:

• Failure to have all tax returns filed or be up-to-date on withholdings or estimated payments for the current year
• Being in an open bankruptcy proceeding

If you pass that hurdle, keep these two concepts in mind as you move forward:

• When reviewing your OIC, the IRS will determine whether your reasonable collection potential (RCP) is less than the amount you owe.
• You need to support your request with detailed, precise financial records and related documentation.

Determining Reasonable Collection Potential

In reviewing your necessary living expenses, the IRS will apply national standards for items such as food and apparel, and local standards for housing/utilities and transportation. They also apply a national standard for medical expenses. While the IRS will consider exceptions to the limits, the taxpayer must provide documentation explaining the reasons, such as the high costs of treating a medical condition.

Regarding income, the IRS will look at the likelihood that your earning capacity will change. They will consider the ratio of your expenses to income, but they will also look at your ability to pay from liquid assets, such as savings accounts, or by liquidating assets, such as a home. The IRS cannot force you to sell your primary residence, but if you have a high amount of equity in it, that will reduce the likelihood that they will approve your OIC.

And in the context of the records you provide, the IRS will determine whether the offer amount you propose is realistic and appropriate.

The OIC Experts at Highland Tax Group Can Help

An IRS  ETA Offer in Compromise requires careful and thorough preparation for the best chance of success. Contact the experts at Highland Tax Group. Our team is here to help when you need a strategy regarding your tax debt.