Offer in Compromise
An Offer in Compromise (OIC) is an agreement between the taxpayer and the government that settles a tax liability for payment of less than the full amount owed.
The Internal Revenue Service and State of California tax agencies will generally accept an OIC when it is unlikely the tax liability can be collected in full and the amount offered “reasonably” reflects collection potential. “Reasonably” as determined by the tax agencies is not necessarily what a taxpayer thinks is reasonable.
There are three types of Offers involving IRS; doubt as to collectability, doubt as to liability, and effective tax administration (ETA). The most typical OIC is the collectability issue—the taxpayer is unable to pay the taxes in full, and the IRS is satisfied full payment cannot be achieved by liquidating assets or by installment agreements. The IRS makes the decision whether an offer is acceptable based on full financial disclosure by the taxpayer.
Doubt as to liability OICs are submitted when the taxpayer has a “legitimate doubt that all or a portion of the liability is owed.” “Legitimate” is the key word here; IRS is very narrow minded as to what constitutes a “legitimate doubt.”
ETA (Effective Tax Administration) offers means the taxpayer does not doubt the liability is correct and there is potential to collect the full amount, but an “exceptional circumstance” exists that would allow IRS to consider an offer. To be eligible, a taxpayer must show collection of the liability would create an “economic hardship” or it would not be “fair or equitable” to collect the liability. Key words here are “economic hardship” and “fair or equitable”, which may be vastly different as perceived by the taxpayer and the IRS.
There are many pitfalls and dangers that should be considered before submission of any Offer in Compromise to the IRS or California tax agency. It is not uncommon that the submission (and ultimate rejection) of an OIC has caused a taxpayer more grief than what the taxpayer started with. We will advise a client whether or not to submit an OIC and the consequences of that action.