An Offer in Compromise (a.k.a. OIC) is an agreement between the IRS or state taxing authorities and the taxpayer that settles a tax liability for agreed upon amount that is less than the full amount owed. This is a great tool for resolving debts that are not affordable to pay off.

The IRS and each state taxing authority has its own policy on whether or not they will consider a settlement proposal from a taxpayer and what the procedures are for submitting one.

With most taxing authorities, before an OIC can be submitted a taxpayer must:

• be in full tax-filing compliance for all tax types;
• be current with estimated tax payments of all types for the current year; and
• been current with federal payroll withholding or sales tax deposits for some material period of time. The taxing authorities will often times not consider settlement proposals from taxpayers that don’t meet this criteria. As a result, taxpayers that want to propose settlements typically need to make it their first priority to meet these standards of compliance.

There are primarily three different types of settlements that can be proposed to the taxing authorities:

1. Doubt as to Liability - This means that doubt exists that the tax amount assessed is correct or is assessed against the proper taxpayer(s);
2. Doubt as to Collectibility- Doubt exists that the taxpayer has the means to pay off the full amount owed; and
3. Effective Tax Administration- The taxpayer owes the taxes and could pay, but payment may create a unique hardship to the taxpayer or to someone else, such as employees, relatives, etc.

The most common type of OIC is the “doubt as to collectibility” version. To qualify for this type of settlement, a taxpayer generally must be able to prove that they have no way to actually pay off the tax liabilities owed within the remaining legal time period that the taxing authorities have remaining to try and collect. Once that is established by validation of a taxpayer’s financial situation, the taxing authorities will often use mathematical formulas (which change from time to time) to determine how much of settlement could be deemed acceptable for the taxpayer. The more equities in assets and monthly disposable income that a taxpayer has to pay, generally the higher the required settlement amount will be.

If accepted, payment terms for an Offer in Compromise tax settlement can be in one of three methods: a single lump sum payment (typically within 5 months of acceptance), a short-term deferred payment (payment plans of less than 2 years), or a long-term deferred payment plan (payment plans extending 2 years or more).

There are other indirect benefits of submitting an offer-in-compromise. While an OIC is being considered, the IRS must stop their collection action, including levying (garnishing) any assets or wages. This can be a useful tool for a taxpayer who is being pursued by IRS so long as the OIC is reasonable to propose.

If you don't really owe your taxes, owe more than you can afford to pay, or have the capability to pay, but would suffer a hardship if you remitted payment, then you may be a good candidate for an OIC. If so, contact our office to discuss your case and to start the process of resolving your tax problems.