Offer in Compromise (OIC) allows the taxpayers to settle their tax debt with the IRS. An offer in compromise may be submitted when there is doubt as to the taxpayer’s tax liability or collectibility. It is similar to the bankruptcy proceedings since the taxpayer gets a “fresh start” from the delinquent tax liabilities once and for all.
It is important to know that the IRS has discretion to compromise any civil or criminal case arising under the internal revenue laws.
Doubt as to liability. If a taxpayer can establish a genuine dispute as to the existence or amount of the correct tax liability under the law, he or she may be eligible to submit an offer in compromise based on doubt as to liability. If this is the sole basis for the offer, the taxpayer is not required to provide a monetary amount for the offer or their household financials.
Doubt as to collectibility. When the government concludes that the taxpayer’s finances are never going to get better, the IRS may choose to write off a portion of the debt balance and accept a lower amount than the taxpayer owes. That is, the IRS may be willing to accept less than the full balance of the delinquent amount, if the taxpayer can offer an amount of money that the IRS could not otherwise reach through its levy powers.
You should consider submitting an offer in compromise based on doubt as to collectibility when your financial situation is such that you would not be able to pay the tax liability in full during the period of the statute of limitations for collections.
Compliance Requirement. Before the IRS considers you offer in compromise, they will review your offer for processability, including that all tax returns have been filed.
Effective Tax Administration. If neither doubt as to liability no doubt as to collectibility provides a basis for compromise, an offer may be entered to promote effective tax administration.
This ground may be available to you if the collection would create an economic hardship or would be detrimental to voluntary compliance by the taxpayers. Examples of the economic hardship provided in the Treasury Regulations include situations where the taxpayer has the means to pay the tax liability but he or the member of the family has a long-term illness or a disability and payment of the tax would deplete the assets needed for care in the future.
As with all offers in compromise, the acceptable amount is left to the discretion of the IRS.
Settlement Amount. The Service determines the adequacy of the offer on case-by-case basis by calculating the minimum offer amount based on the reasonable collection potential. The IRS takes into account the taxpayer’s assets, income, and necessary living expenses. In determining the taxpayer’s monthly disposable income, the IRS uses the national standards with some flexibility to make adjustments for the specific taxpayer’s situation.
Payment. When the offer in compromise amount is accepted, the payment must be made under one of the three following options:
- All cash and within 90 days;
- A midterm payment period (90 days to two years);
- A time period longer than two years but shorter than the statute of limitations for collections.
San Diego Tax Law Group can help you determine if the option of the offer in compromise is available to you and assist you in the preparation and submission of your offer to the Internal Revenue Service. Contact San Diego Tax Law Group today to explore the option of settling your tax debt for less.