What is an “Offer in Compromise” (OIC)?
For tax payers overburdened by tax debt, the IRS provides for an “Offer in Compromise.” The IRS has the authority to settle, or “compromise” federal tax liabilities by accepting less than full payment under certain circumstances. An offer in compromise is an agreement between a taxpayer and the IRS that resolves the taxpayer’s tax debt.
To make it easier for taxpayers to determine if they are eligible for the program and to prepare the necessary forms accurately, the Offer in Compromise application package, IRS form 656, was recently redesigned with new instructions, worksheet and checklist. The IRS will consider an offer in compromise only after all other payment options have been exhausted. If you, as a taxpayer, are unable to pay your taxes in full, there are other payment options, such as monthly installment agreements, that you must explore with the help of your CPA before you can submit an offer in compromise. (Form 9465 Installment Agreement Request.)
If you are a taxpayer who is unable to pay your taxes in full and you have explored the various options, you should consult your CPA who will help you review the checklist in the Form 656 package to determine if you are eligible for an offer in compromise.
The IRS will generally accept an offer in compromise (OIC) when it is unlikely that the tax liability can be collected in full and the amount offered reasonably reflects collection potential. The IRS considers an OIC as a legitimate alternative to declaring a case currently not collectible or to a protracted installment agreement. The IRS wants to collect what is potentially collectable at the earliest possible time and at the least cost to the government.
In turn, you as taxpayer are expected to provide reasonable documentation to verify your ability to pay. The ultimate goal is a compromise which is in the best interest of both the taxpayer and the IRS. Acceptance of an adequate offer will also result in creating a fresh start for you, the taxpayer, with an expectation of compliance with all future tax filing and tax payment requirements.