What Is An IRS Offer in Compromise

An Offer is an agreement between a taxpayer and the Internal Revenue Service that resolves the taxpayer's tax liability. The IRS has the authority to accept a settlement or Compromise, of federal tax debt by accepting less than a full payment under certain circumstances. An Offer provides for a fresh start by allowing you to reduce or eliminate your IRS tax debt.  Or it may allow you the ability to contests a tax liabilities validity that may have been improperly or incorrectly assessed.

Do You Qualify for Offer in Compromise?

Merely wanting to Compromise your tax debt with the IRS is not enough. The IRS has strict standards for qualification and only a small percentage of Offers are accepted. In fact, during 2004 the IRS approved only 19,546 Offers, a mere 16% of the total number of Offers filed.  

To qualify for an Offer in Compromise you must show the IRS that one of the following conditions exists:

• Doubt as to Liability - Doubt exists that the assessed tax is correct.

• Doubt as to Collectibility - Doubt exists that the taxpayer could ever pay the full amount of tax owed. 

• Effective Tax Administration - There is no doubt the tax is correct and no doubt that the amount owed could be collected, but an exceptional circumstance exists that allows the IRS to consider your Offer. To be eligible for a Compromise on this basis, you must demonstrate that collection of the tax would create an economic hardship or would be unfair and inequitable.

Other Considerations You Must Know To Qualify For An Offer in Compromise

• Individual taxpayer(s) must be in compliance with previous tax years filings. Business must be in compliance with their last 2 quarters tax deposits.  If you are not (in compliance), we can prepare them for you.

• Agree to the Conditions of an Offer in Compromise.

• You are not currently in bankruptcy.

• You cannot full pay to balance of the tax debt under the installment agreement rules.

• Effective July 16, 2006 a new federal law, The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA), will make several key changes to the Offer in Compromise program.  Read more about the new changes in the Offer in Compromise Program.

What are the benefits of filing an Offer in Compromise with the IRS?

• ALL IRS tax debts are settled

• ALL Federal Tax Liens are released upon acceptance and full payment of the Offer

• Generally all collection action ceases while Offer process is pending. For example, bank levies, wage garnishments and property seizure.  However, in most cases, the IRS will file a Notice of Federal Tax Lien to protect their rights.

How Much Should You Offer?

According to the IRS, the minimum Offer amount must generally be equal to (or greater than) the taxpayer's reasonable collection potential (RCP). The reasonable collection potential is defined as the total of the taxpayer's realizable value in real and personal assets, plus his/her future income, minus reasonable living expenses. 

Note: Unless the taxpayer files an Offer in Compromise Claiming special circumstances, the offered amount must equal or exceed the reasonable collection potential. Realizable value is the asset's quick sale value (amount which could be reasonably expected through the sale of the asset) minus what the taxpayer owes to a secured creditor.

If special circumstances exist, the IRS may accept an Offer of less than the total reasonable collection potential. The IRS will consider two special circumstances: (1) payment of the total reasonable collection potential would cause the taxpayer economic hardship; or (2) compelling public policy or equity factors support accepting an amount less than reasonable collection potential.

How long does the Offer in Compromise process take?

An Offer in Compromise is the most comprehensive and time consuming investigation a taxpayer will experience with the Collection Division of the IRS. Generally the Offer process takes 6 to 12 months.

An Offer in Compromise application may now be returned, or rejected, based on the following criteria:

• Taxpayer resubmits an Offer in Compromise that is not materially different from a previous Offer that was either previously rejected with appeal rights or returned. The resubmission reflects an amount that is substantially similar to, the same, or less than the prior Offer without a material difference in the taxpayer’s financial situation or appearance of special circumstances.

• Taxpayer resubmits an Offer in Compromise within one year of having defaulted and received a termination letter. The taxpayer has failed to resolve the previous default situation and the new submission is substantially similar to, the same, or less than the prior Offer without there being a change in the taxpayer’s financial situation or special circumstances.

• An Offer in Compromise is filed solely to delay enforcement actions after a collection employee has determined and communicated to the taxpayer the intent to enforce collection through levy or seizure. The taxpayer has a clear and present ability to pay substantially more than the Offer amount and special circumstances do not exist.

• An Offer in Compromise will be returned during the investigation if the taxpayer does not demonstrate compliance with estimated tax payments and fails and/or neglects to make the required estimated tax payment(s).

If you do not qualify for an Offer in Compromise a viable alternative may be an Installment Agreement or Penalty Relief.

Get immediate help with an Offer in Compromise by contacting us toll free at 877-426-3121 for a Free Consultation.  Or fill in the following form to request a confidential tax analysis.