An offer in compromise (OIC) is an agreement between a taxpayer and the Internal Revenue Service that settles the taxpayer’s tax liabilities for less than the full amount owed. Absent special circumstances, an offer will not be accepted if the IRS believes that the liability can be paid in full as a lump sum or through a payment agreement.
In most cases, the IRS will not accept an OIC unless the amount offered by the taxpayer is equal to or greater than the reasonable collection potential (RCP) of the tax liability. The RCP is how the IRS measures the taxpayer’s ability to pay and includes the value that can be realized from the taxpayer’s assets, such as real property, automobiles, bank accounts, and other property. The RCP also includes anticipated future income, less certain amounts allowed for basic living expenses.
Three Reasons the IRS May Accept an Offer in Compromise
The IRS may accept an offer in compromise based on three grounds:
- Doubt as to Collectability. An OIC is possible if the IRS doubts that the taxpayer could ever pay the full amount of tax liability owed within the remainder of the statutory period for collection.
- Example: A taxpayer owes $20,000 for unpaid tax liabilities and agrees that the tax she owes is correct. The taxpayer’s monthly income does not meet her necessary living expenses. She does not own any real property and does not have the ability to fully pay the liability now or through monthly installment payments.
- Doubt as to Liability. When a legitimate doubt exists that the assessed tax liability is correct, the IRS may agree to an OIC. Doubt may exist as to liability when: (1) the examiner made a mistake interpreting the law, (2) the examiner failed to consider the taxpayer’s evidence or (3) the taxpayer has new evidence.
- Example: The taxpayer was vice president of a corporation from 2010-2011. In 2012, the corporation accrued unpaid payroll taxes and the taxpayer was assessed a trust fund recovery penalty as a responsible party of the corporation. The taxpayer was no longer a corporate officer and had resigned from the corporation on 12/31/2011. Since the taxpayer had resigned prior to the payroll taxes accruing and was not contacted prior to the assessment, there is legitimate doubt that the assessed tax liability is correct.
- Effective Tax Administration. In this situation, there is no doubt that the tax is correct and there is potential to collect the full amount of the tax owed, but an exceptional circumstance exists that would allow the IRS to consider an OIC. To be eligible for compromise on this basis, a taxpayer must demonstrate that the collection of the tax would create an economic hardship or would be unfair and inequitable.
- Example: Mr. & Mrs. Taxpayer have assets sufficient to satisfy the tax liability and provide full time care and assistance to a dependent child, who has a serious long-term illness. It is expected that Mr. and Mrs. Taxpayer will need to use the equity in assets to provide for adequate basic living expenses and medical care for the child. There is no doubt that the tax is correct.
Yee Law Group, PC: Sacramento and Roseville Area Tax Attorneys
If you are facing a significant IRS tax liability and would like to discuss the possibility of an offer in compromise or explore other options to resolve your tax matter, please contact the experienced Sacramento/Roseville area tax attorneys at Yee Law Group, PC at (916) 599-7297. We look forward to the privilege of being your attorneys.