An Offer in Compromise (“OIC”) is a formalized settlement procedure by which the IRS agrees to settle tax liability for less than the full amount owed.  This is a long and involved process that is available to taxpayers that qualify according to certain IRS formulas and calculations.

Kinds of Offer in Compromise

There are three different kinds of OIC – Doubt as to Liability, Doubt as to Collectability, and Effective Tax Administration.

  • A Doubt as to Liability Offer is an uncommon approach.  It applies where there is a genuine dispute about the correct tax debt.  However, this Offer is not available where the judgment was established by a final court decision or if the assessed debt is based on current law.  If both the taxpayer and the IRS agree that the correct amount of tax is different from the assessed amount, the IRS may accept the Offer.  However, there are often many different approaches to reach this same result.
  • A Doubt as to Collectability Offer is a function of the taxpayer’s assets and expected future income, based on IRS standards and regulations.  Essentially, the heart of the Offer is that the taxpayer does not have sufficient assets and income to pay the tax debt in full.  Once the proper information is entered into the equation, it will create a minimum offer amount, which is the bare minimum the IRS would consider accepting.
  • An Effective Tax Administration Offer is where the taxpayer has sufficient assets to pay the tax owed, but that requiring payment would create an “undue hardship” under IRS guidelines.  This Offer type is reserved for very special situations, such as individuals with permanent disabilities, elderly taxpayers with fixed income, or people with serious and expensive medical conditions.
The Process

The IRS average acceptance rate hovers around 40%.  However, if a taxpayer qualifies and the Offer is done properly, it can be an effective tool for relieving taxpayers from overly burdensome tax debt.  The following steps generally describe the Offer in Compromise process from beginning to end.

Step 1. Discovery

Tax problems often work like icebergs – you only see a portion of what’s going on.  The IRS may be sending letters for one year, but there may be hidden issues like missing returns or tax debt for other years.  It’s important to work with the IRS to understand the full scope of the problem before attempting a resolution.

Step 2. Compliance

Tax compliance is a highly important factor for the IRS when considering an Offer in Compromise or installment agreement.  In fact, the IRS will often automatically reject Offers where the taxpayer is not compliant.  Essentially, the IRS wants to make sure that, if the IRS is going to accept less than the amount due, the same kinds of issues won’t crop up in the future.

Step 3. Offer Preparation

After the taxpayer is in compliance, the Offer process can begin.  To begin, it’s important to determine whether you qualify for an Offer based on your assets and income.  Those values are then entered on the proper IRS forms, based on IRS rules and regulations – not every expense is a valid expense in the eyes of the IRS.   Then, documentation needs to be reviewed, sorted, organized, and prepared for the Offer. Generally speaking, each line entry will have a corresponding document.  A proper Offer in Compromise can often be several hundred pages thick!  After the entire packet is complete, we make sure everything is clear and easy to understand for the IRS agent, which makes the process easier.

Step 4. Waiting

Once the Offer is submitted, it can take anywhere from six months to over a year for the IRS to process the Offer and issue a decision.  Recent budget cuts, resulting in personnel cuts, have affected these times for the worse.  Once the IRS reviews the Offer, if there is missing, incomplete, or incorrect information and documentation, they often make a request from the taxpayer or representative, which delays the process.  During this period, the taxpayer must still make the payments indicated on the forms.

Step 5. Decision

Once the IRS has completed review, they will issue a decision.  If the decision is to reject the Offer, the taxpayer may attempt to appeal the decision to IRS Appeals.

Step 6. Ongoing Compliance

Acceptance isn’t the end of the process.  The taxpayer must still continue to make the appropriate payments and stay in tax compliance while they are under the Offer in Compromise.  Missed payments or new tax debt can result in an immediate termination of the Offer.

As long as the appropriate procedures are followed, the Offer can be an incredible tool for helping you get back on your feet.

If you need a professional to help guide you through the process, feel free to contact us at (720) 507-1829 for a free consultation to go over your tax matter with you.  You can give US a call even on evenings and weekends – we’re here when you need us.