Overview: An Offer in Compromise (“OIC”) is an agreement that allows taxpayers to settle their tax debt for less than the full amount owed. An Offer in Compromise may be based on the following provisions: (1) Offer In Compromise Doubt as Liability (“OIC DATL”); (2) Offer In Compromise Doubt as to Collectibility (“OIC DATC”); (3) Doubt as to Collectibility with Special Circumstances; or, (4) Effective Tax Administration. The OIC DATL, is used when the taxpayer believes the actual amount of tax is incorrect based upon a provision in Internal Revenue Code and has evidence/facts to support their claim.
This type of offer is sometimes used instead of an Audit Reconsideration because the IRS Offer In Compromise Unit has a better tracking system and response rate. The second type of offer is the OIC DATC. This offer is based on the fact that the taxpayer doesn’t have sufficient income and assets to full pay the liability.
Contrary to popular belief, the amount of the offer is not a random number or percentage the taxpayer would like to pay, but based on a mathematical financial formula that is summarized as follows:
(Income – Necessary Living Expenses) = X multiplied by 12 months (if you will pay your offer in 5 months of fewer) or multiplied by 24 months (if you will pay your offer in 6 – 24 months) + Equity in Assets (minus exemptions) = Minimum Offer Amount.
Generally, the IRS will accept an offer if it represents the most the agency can expect to collect within a reasonable period of time (also known as Reasonable Collection Potential or RCP). The IRS will not accept an offer if it believes that the taxpayer can pay the amount owed in full as a lump sum or through a payment agreement. The IRS looks at several factors, including the taxpayer’s income and assets, to make a decision regarding the taxpayer’s ability to pay.
The third type of offer is the OIC Doubt as to Collectibility with Special Circumstances. Under this provision, the IRS still considers the taxpayer’s ability to pay, but also considers additional factors such as age, employment status, dependents, education, mental or physical illness, etc.
Lastly, the OIC based on Effective Tax Administration is an offer where the taxpayer is able to pay the tax in full, but collection of the full liability would cause the taxpayer economic hardship or there are compelling public policy or equitable considerations to compromise the tax, and compromising the liability will not undermine compliance by taxpayers with the tax laws.
Requirements: All returns must be filed and any required estimated tax payments made if applicable. Taxpayer must pay $186.00 application fee and include a 20% deposit unless they qualify for low-income certification.
Liens: Tax liens removed if offer amount is accepted and paid in full.
Pros: Taxpayer may settle for substantially less or “pennies on the dollar.” I am sure you have heard many TV and Radio ads for nationwide scam tax resolution services/companies advertising such deals. While it is true that some can settle their tax debt for substantially less or pennies on the dollar, each individual’s circumstances are different and it is based on the individual’s financial ability to pay and unique facts of their case. Tax liens will be removed once offer is accepted and paid in full. Offers are automatically accepted if the IRS does not make a determinate within two years of receiving the offer in compromise package.
Cons: From start to finish an offer takes approximately 1 ½ years to complete. Taxpayers must remain complaint for the next 5 years after the acceptance of an offer. Any balance due during that period can default the agreement and the tax debt will be due in full. Any tax refunds due within the calendar year in which the offer is accepted will be applied to the past due tax liability.
In addition, very few offers are accepted. Individuals that qualify for Currently Non-Collectible Status and possess other factors (age, disability, mental health issues, physical illness, lack of education, etc.) are more likely to have an offer accepted. During the time a taxpayer is in the offer the IRS collection statute expiration date (“CSED”) is tolled by the time in the offer plus 30 days. Tolling means time is added to the initial statue of 10 years. Thus, the taxpayer may be required to continue making monthly payments based on offer amount, but the statute is not running. It is very important to choose a qualified Atlanta Tax Attorney that has the experience and knowledge to know if your offer is likely to get accepted before it is submitted.
Beware: Many nationwide tax resolution services/companies promise taxpayers that they will settle their IRS tax debt for “pennies on the dollar” by filing an offer in compromise when the individual is not a good candidate. These type of nationwide scam tax resolution companies end up making money regardless if the taxpayer’s offer is accepted. Most of the time, the taxpayer is left paying the fee to one of these scam companies, their offer was rejected, they still owe the tax, and more time has been added for the IRS to collect, which leaves the taxpayer in a worse condition than they started.