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IRS Offer in Compromise

Posted by Kamyar Mehdiyoun, Esq. | Oct 15, 2023

What is an Offer in Compromise?

An Offer in Compromise (OIC) is a specialized legal arrangement that allows you to settle your tax debts for less than the full amount you owe. This agreement is made between you, the taxpayer, and the IRS, serving as a mutually beneficial solution to resolve outstanding tax liabilities.

How Does It Work?

When you find yourself burdened by tax debts that seem insurmountable, an IRS Offer in Compromise emerges as a potential lifeline. However, securing this agreement isn't as simple as making an offer and hoping for the best. It involves a thorough evaluation of your financial situation, including assets, income, expenses, and future earning potential. The IRS assesses this information to determine whether collecting the full tax debt is feasible or if accepting a lesser amount would be in the best interest of both parties.

Legal Implications

An Offer in Compromise is a legally binding agreement. Once accepted, you must adhere to the terms, which usually involve a lump sum or installment payments. Failure to meet these conditions can result in the IRS revoking the agreement, leaving you back at square one with your original tax debt, plus penalties and interest.

Why Consider an Offer in Compromise?

The reasons for considering an OIC can vary, but they often include financial hardship, inability to pay the full tax amount within the statutory period, or genuine disputes regarding the tax liability. 

Real Considerations for OIC

1. Overwhelming Tax Debt: When the tax debt is too large to be paid off with current financial resources.
2. Financial Hardship: When paying off the tax debt would result in significant financial hardship and affect basic living expenses.
3. Uncertain Liability: When there's a genuine dispute about the actual tax liability.

Who Is Eligible for an Offer in Compromise?

Key Qualifications

1. Compliance with Tax Requirements: You must be current with all filing and payment requirements. Failure to meet these obligations could result in the IRS returning your offer.

2. No Open Bankruptcy Proceedings: You are not eligible for an OIC if you are currently involved in an open bankruptcy proceeding.

3. Low-Income Certification: If you meet the Low-Income Certification guidelines, you are exempt from sending any money with your offer.

4. Trust Fund Taxes: If your business owes liabilities that include trust fund taxes, responsible individuals must settle the trust fund portion of the tax before submitting an OIC.

Criteria for Securing an Offer in Compromise Approval

Understanding the grounds for IRS approval can bolster your chances of a successful Offer in Compromise. Here are the primary criteria:

1. Doubt as to Collectibility: This is the most common ground for approval. The IRS will consider an OIC if there's doubt that the tax debt can be fully collected.

2. Effective Tax Administration: The IRS may approve an OIC if there's no doubt the tax could be collected but doing so would create an unfair economic hardship.

3. Doubt as to Liability: This is less common but applicable if there's a genuine dispute about the amount of tax debt owed.

4. Payment Options: The IRS provides two payment options—Lump Sum Cash and Periodic Payment. Your choice of payment option can also influence the approval of your OIC.

5. Federal Tax Lien: While a Notice of Federal Tax Lien (NFTL) can be filed at any time, understanding its implications can help you better navigate the OIC process.

A successful offer in compromise requires extensive preparation and analysis of the IRS regulations and the specific circumstances of the taxpayer. A taxpayer who is considering entering into an offer in compromise must think about the pros and cons of making an offer, the eligibility requirements, the dollar amount of the offer and how to best negotiate a successful compromise with the IRS. Even if he or she qualifies, entering into an offer in compromise is not always the taxpayer's best option.

If you are considering settling your tax debts, contact Mehdiyoun tax law firm. We will help you find the best option for reducing your tax obligations.

About the Author

Kamyar Mehdiyoun, Esq.

Kamyar Mehdiyoun, holds a Master of Law (LL.M.) degree in taxation from Georgetown University Law Center and focuses his practice on tax law. In 2003, he received the Award for Excellence in Tax Practice and Procedure from Georgetown. He also holds a Certificate in Employee Be...

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