What is an Offer in Compromise?
The IRS will often enter into installment agreements with taxpayers who have tax debt of less than $25,000. Installment agreements for tax debts over $25,000 are more difficult to obtain.
If the tax payer does not qualify for an installment agreement or if the taxpayer does not want to file for bankruptcy, then they may be able to take advantage of the offer in compromise (OIC) program. Generally, the OIC program should be viewed as a last resort, after taxpayers have explored all other available payment options. The IRS resolves less than one percent of all balance due accounts through the OIC program.
An offer in compromise is an agreement between a taxpayer and the IRS that resolves the taxpayer's tax debt. The IRS has the authority to settle, or "compromise," federal tax liabilities by accepting less than full payment under certain circumstances. A tax debt can be legally compromised for one of the following reasons:
- Doubt as to Liability - Doubt exists that the assessed tax is correct.
- Doubt as to Collectibility - Doubt exists that you could ever pay the full amount of tax owed.
- Effective Tax Administration - There is no doubt the tax is correct, and no doubt that the amount owed could be collected, but an exceptional circumstance exists that allows the IRS to consider a taxpayer's OIC. To be eligible for a compromise on this basis, the taxpayer must demonstrate that collection of the tax would create an economic hardship or would be unfair and inequitable.
Taxpayers should beware of promoters' claims that tax debts can be settled for "pennies on the dollar" through the Offer in Compromise Program. Check with a qualified tax professional to see if any offer in compromise is right for you.
About the Author: Carl H. Starrett II has been a licensed attorney since 1993 and is a member in good standing with the California State Bar and the San Diego County Bar Association. Mr. Starrett practices in the areas of bankruptcy, business litigation, construction, corporate planning and debt collection.