Why Is It So Hard to Understand the Rules for IRS Offer in Compromise?

Why Is It So Hard to Understand the Rules for IRS Offer in Compromise?

Media ads blast through the airwaves, promising that you can settle your outstanding tax bill for just pennies on the dollar. However, these commercials make it seem as though anyone will qualify for these ridiculously low payments. While it’s true that the Internal Revenue Service will work with taxpayers and set up payment plans, only qualifying taxpayers will be able to take advantage of an offer in compromise. However, like most aspects of the IRS, the OIC rules can be admittedly difficult to understand. Statistics show that the federal agency only accepts about one-fourth of all OICs.

Why Do OICs Have Such a Low Acceptance Rate?

The IRS does not accept OICs for two main reasons:

  1. The taxpayer does not meet the strict criteria or
  2. He or she is unable to pay the OIC amount.

Clearing Up Misconceptions about OICs

The IRS uses specific formulas to determine an acceptable OIC amount and payment. The agency considers your ability to pay the debt prior to the collection statute expiration date. To see whether you meet the criteria, go to IRS.gov. Even so, you still might not be able to obtain an OIC if you cannot pay the offer amount.

The IRS uses two separate formulas – one to qualify people and one to determine the offer amount. The key difference is that the offer amount looks at one to two years of future earnings and disposable income while the qualification process takes a larger overview. You will need to carefully review your equity, assets, living expenses, debt and disposable income before you decide to actively pursue an OIC.

In other situations, you might have incorrectly calculated your equity, assets and resulting monthly disposable income. The IRS will refigure what you owe, adjusting the total and your payment amount, resulting in a significantly higher OIC. In these cases, you might instead file for currently not collectible status, a different installment plan or even bankruptcy.

Contact Our Tax Professionals for Assistance

Our office can explain the rules for OICs and help you put together an offer. Contact us at 720-398-6088 today to speak with a tax representation specialist about your needs.