On your terms. At your pace.
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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. This includes actual income or payroll tax owed plus IRS penalty and interest.
In most cases, the IRS will not accept an offer unless the amount offered by the taxpayer is equal to or greater than the reasonable collection potential (the RCP). The RCP is how the IRS measures the taxpayer’s ability to pay. The RCP includes the value that can be realized from the taxpayer’s assets, such as real property, automobiles, bank accounts, and other property. In addition to property, the RCP also includes anticipated future income, less certain amounts allowed for basic living expenses. Simply put, it is net disposable income plus net equity. If those numbers are less than what you owe, then you are in a position to make an offer. If you are not, it’s a waste of time. Do not do this if you intend to stay in business. The IRS will not give you an unfair advantage over your competitors.
The IRS may accept an OIC based on three grounds. First, acceptance is permitted if there is doubt as to liability. This ground is only met when genuine doubt exists that the IRS has correctly determined the amount owed. You don’t or shouldn’t owe the back tax. Second, acceptance is permitted if there is doubt that the amount owed is collectible. This means that doubt exists in any case where the taxpayer’s assets and income are less than the full amount of the tax liability. This is the most common type of offer. Circumstances have changed for you financially, and you’ll never be able to pay it back. Third, acceptance is permitted based on effective tax administration. An offer may be accepted based on effective tax administration when there is no doubt that the full amount owed can be collected, but requiring payment in full would either create an economic hardship or would be unfair and inequitable because of exceptional circumstances. A good example of this is you lived on a fixed income and your only asset is the home you live in.
Taxpayers may choose to pay the offer amount in a lump sum or in installment payments. The tax law provides rules for “lump sum offers” and “periodic payment offers” submitted on or after July 16, 2006. A lump sum offer is defined as an offer payable in 5 or fewer installments. If a taxpayer submits a lump sum offer, the taxpayer must include with the Form 656 a nonrefundable payment equal to 20 percent of the offer amount. There is a common misconception that 20% must be submitted with all offers. This payment is required in addition to the $150 application fee. The 20 percent amount is called “nonrefundable” because it cannot be returned to the taxpayer even if the offer is rejected or returned to the taxpayer without acceptance.
Ordinarily, the statutory time within which the IRS may engage in collection activities is suspended during the period that the OIC is under consideration and is further suspended if the OIC is rejected by the IRS and the taxpayer appeals the rejection to the IRS Office of Appeals within 30 days from the date of the notice of rejection. This means they get to extend their time to collect from you. The statutory clock stops ticking.
If the IRS rejects an OIC, then the taxpayer will be notified by mail. The letter will explain the reason that the IRS rejected the offer and will provide detailed instructions on how the taxpayer may appeal the decision to the IRS Office of Appeals. The appeal must be made within 30 days from the date of the letter. Do not miss this deadline. you’ll void the appeal process completely. In some cases, an OIC is returned to the taxpayer, rather than rejected, because the taxpayer has not submitted necessary information, has filed for bankruptcy, has failed to include a required application fee or nonrefundable payment with the offer, or has failed to file tax returns or pay current tax liabilities while the offer is under consideration. A return is different from a rejection because there is no right to appeal the IRS’s decision to return the offer. A new offer in compromise may be submitted if circumstances warrant.
Additional information about the offer in compromise program can be found on Form 656 (PDF), Offer in Compromise, The IRS Collection Process, or by visiting the http://www.irs.gov Offers in Compromise web page.
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