Offer in Compromise
The IRS has the authority to settle or compromise federal tax liabilities by accepting less than full amount under the program of Offer In Compromise. One of the three circumstances must be established in order for the IRS to accept IRS Offer in Compromise and resolve the debt:
- Inability of the taxpayer to pay off the tax debt in full. This is the most common type of Offer in Compromise (OIC). Under this type of OIC the taxpayer makes a representation that based on the taxpayer's financial condition IRS will not be able to collect the entire tax bill from the taxpayer. The amount of this OIC must reflect the amount of the equity in taxpayer's assets plus the amount that the IRS could collect from taxpayer's future income.
- Actual presence of tax liability. The taxpayer must prove that the amount of tax or any penalties being billed by the IRS are erroneous. This OIC is generally used if a taxpayer was unable to defend himself against an assessment by the IRS, and has now discovered additional evidence to prove that the amount being billed is wrong.
- The settlement would promote effective tax administration. This type of offer requires the taxpayer to explain his exceptional circumstances, showing why requiring the payment of the tax liability in full would either create an economic hardship or would be unfair and inequitable.
A successful Offer in Compromise can provide to the taxpayer such significant benefits as:
- The IRS will hold collections while the OIC is being considered;
- Tax liens will be released once the o OIC is completed;
- OIC allows the taxpayer to stay out of bankruptcy, and even reduce taxes that would not have been dischargeable in bankruptcy.
There are also downsides of the Offer in Compromise process. The main negative features of making an OIC are as follows:
- The taxpayer must make a full financial disclosure to the government;
- Certain tax benefits will be waived if OIC is accepted;
- A federal OIC does not resolve state taxes or any other debts.
The acceptance of the IRS Offer in Compromise requires that the taxpayer must remain current on all tax obligations for a period five (5) years. That means the IRS might revoke the OIC, if the taxpayer's OIC is accepted and paid in full, but he later fails to pay current income taxes or other taxes.