Irs Offer Compromise

An IRS Offer in Compromise – or OIC – is a settlement agreement between a taxpayer and the Internal Revenue Service in terms of which the IRS agrees to accept payment of an amount less than that owed by the taxpayer in full and final settlement of their claim.

The IRS has made it clear that Offers in Compromise can only be considered after all other settlement options have been exhausted, and this is as IRS officials do not want to encourage settlement of delinquent taxes for less than the full amount plus all applicable penalties and interest. Should a taxpayer approach the IRS in order to reach some settlement regarding liquidating a tax liability, the IRS will first investigate whether a payment agreement – in terms of which the entire amount is paid over a protracted period of time – is a possibility. It is only when they have satisfied themselves that a taxpayer is not now – and never will be – in a position to settle the tax debt in full, that IRS officials will consider accepting an Offer in Compromise.

There are three basic situations in which the IRS will consider accepting an Offer in Compromise. The first situation is where the IRS has investigated the taxpayer’s ability to pay the tax – and interest and penalties – in full during the remaining statutory collection period and has determined that the taxpayer will not be able to do so. The second situation is where there is some element of doubt as to the correctness of the tax assessment as raised by the IRS, and the third and final situation is where, despite the tax assessment’s being correct and the taxpayer being able to pay it, there exists some unique mitigating factor that would make it inequitable and unfair for the IRS to insist on payment.

The IRS will take note of all assets owned by a taxpayer – as well as the tax payer’s potential for future earnings – in order to calculate whether he can pay the full amount and, if not, exactly how much he can pay. Once their investigation has been completed, IRS officials will negotiate with the taxpayer to determine exactly how the reduced amount that will be due in terms of the Offer in Compromise will be paid. There are three basic payment methods that have proved to be acceptable to the IRS, and these are: a lump-sum cash payment plan that requires immediate payment in as few as 5 installments, a short term periodic payment plan that involves settling the tax liability within 24 months from the IRS’s receipt of the Offer and a deferred period payment plan in terms of which the outstanding tax has to be settled over the remaining statutory collection period.

Offers in Compromise are known as attractive payment alternatives, but, given that the IRS will not often agree to accept less than what is due to them, OICs will not be available to many taxpayers.