What is the IRS Offer in Compromise also known as OIC?
One of the most common questions I get asked as a tax controversy attorney by debt-saddled taxpayers is “how do I reduce my tax debt and pay pennies on the dollar?” Most of us are familiar with radio advertisements touting such results or have known of someone who knows someone that had their tax debt so reduced through an unspecified government program. Although it is certainly a great marketing slogan, in reality, “paying pennies on the dollar” is a grossly misleading statement. While negotiating a compromise on a six or seven figure tax debt is certainly not unheard of (and a result I have achieved for past clients), numerous factors are considered in determining the amount that the taxpayer, if eligible, can compromise, and the process is neither simple nor straightforward. This article will briefly discuss the basics of qualifying for an IRS Offer in Compromise (“OIC”), grounds for acceptance, payment options, and consequences of entering into such an arrangement.
An OIC is an agreement between the taxpayer and the Internal Revenue Service (“IRS”) in which the taxpayer’s liability is reduced, generally based on the taxpayer’s ability to pay, rather than what the taxpayer actually owes. If successful, an OIC can provide a fresh start for a taxpayer burdened by tax liabilities. While an application for an OIC is being considered, the IRS will cease all collection action. Once an OIC is accepted and the offer amount is paid in full, the liabilities covered by the OIC will be considered satisfied. Furthermore, any Federal Tax Liens filed based on the offer liabilities will be released, improving the taxpayer’s credit scores and ability to borrow.
Terms and Qualification
When entering into an OIC, the taxpayer must agree to pay the offer amount within a designated timeframe and remain compliant for five years: (i) timely filing all returns and paying any taxes due, (ii) agreeing to the retention, by the IRS, of any tax refunds, payments, and credits applied to the taxpayer’s tax debts prior to the acceptance of the OIC and (iii) forfeiting any tax refunds that would have been payable during the calendar year that the OIC is approved. Remaining compliant with the requirement for timely filing of returns and payment of tax is crucial, as failure to do so while an offer is pending or during the five year period after acceptance may result in the return of a pending offer or the invalidation of one that had been accepted.
To qualify for an OIC, the taxpayer must be current on all required tax filings and payments for the current year, including payments of estimated tax. If the taxpayer is an employer, they also must be current on any federal tax deposits for the current quarter. Generally, the IRS will not accept an OIC unless the amount offered is equal to or greater than the reasonable collection potential (“RCP”) of the taxpayer. The RCP is how the IRS measures a taxpayer's ability to pay their liabilities. It includes amounts that could be realized from the liquidation of the taxpayer's assets, such as real property, retirement accounts, investment funds, and bank accounts. In addition, the RCP calculation also includes the taxpayer’s anticipated future income less amounts allowed by the IRS for reasonable living expenses.
Grounds for Acceptance
The IRS may accept an Offer in Compromise based on one of three grounds: doubt as to liability, doubt as to collectability, or efficient tax administration. First, an OIC may be made on the basis of doubt as to liability where there is a genuine dispute as to the existence or amount of the correct tax debt under the law. Does the taxpayer actually owe the tax debt? Doubt as to collectability refers to when the taxpayer's assets and net income or RCP are less than the full amount of the tax liability. Is the taxpayer insolvent? Finally, effective tax administration may be applicable where there is no doubt that the tax is legally owed and that the full amount owed could be collected but requiring payment in full would either create an economic hardship or would be unfair and inequitable due to exceptional circumstances. Are there public policy considerations?
Offer Payment Options
There are two options for payment of the IRS Offer in Compromise amount. The first is the lump sum option. For this option, an initial payment of twenty percent (20%) of the total offer amount must be submitted with the application. Once accepted, the remaining balance of the offer must be paid off within five months. The second option is periodic payment. Under this option, the offer amount must be paid in no more than twenty-four monthly installments, the first of which must be included with the offer application. The taxpayer must continue to make payments while the offer is being considered. Under both lump sum and periodic payment, if an offer is rejected, the IRS will retain all payments made towards the offer and apply them towards the taxpayer’s full tax liability. Both payment options require a $205 filing fee with the application. However, if eligible, per the Low Income Certification guidelines, the IRS may waive the requirement of the initial payment, application fee and monthly installment payments while the offer is pending review.
While the IRS Offer in Compromise "OIC" program is an effective means to provide relief to taxpayers experiencing unbearable debt, it is important to keep in mind that not everyone will qualify. Giving your client reasonable expectations of possible outcomes is very important. The likelihood that your client will settle their tax liability for a small fraction of what is actually owed or “pennies on the dollar” is dependent on multiple factors. In fact, based upon IRS publications, less than half of all offers are accepted. The entire process is arduous, document intensive and often takes over a year. Further, due to the taxpayer typically already being in serious debt, the initial payment and full payment of the offer amount pose real challenges. Finally, if the taxpayer is not compliant with the payment and filing conditions of the IRS Offer in Compromise, the taxpayer risks a default and reassessment of the entire tax balance due. To avoid certain pitfalls, it is strongly advised that you consult a tax professional with IRS Offer in Compromise experience.
Hana Boruchov, Attorney Hana Boruchov, a trusted advisor and mighty advocate, earned her J.D. from Benjamin N. Cardozo School of Law with a concentration in Corporate Law. She’s helped guide both individuals and corporations through the resolution of their federal and state tax controversy matters. A skilled negotiator, she’s facilitated the release of levies, liens, suspensions, and has saved her clients millions of dollars in tax, interest and penalties.
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