Is an Offer in Compromise Right for You?

An offer in compromise (OIC) of tax liability may be the answer to your distressing back-tax problems.

This program, which is available from the IRS, is designed to help settle old income tax debts. Although an OIC is not appropriate for everyone, many clients agree that it can be life-changing.

How Does an Offer in Compromise Work for Tax Relief?

The purpose of an offer in compromise is more about solving the government’s problems than yours. If the IRS determines they have no hope of ever collecting your tax debt, it may make more sense for them to settle than continue to pursue collection. Consequently, they will agree to accept a sum that is less than your original debt.

The basis for an OIC is typically one of two qualifying conditions:

  • Doubt as to the tax liability — This condition applies if the debt the IRS indicates you owe may be incorrect.
  • Doubt as to the collectability of the debt — This condition applies if the IRS believes they have little chance of collecting the full amount you owe.

The IRS publishes forms and instructions for submitting an OIC. The trick is determining the lowest offer that they will accept.

How Much Will I Owe with an Offer in Compromise?

Tax attorneys have no magic answer that question, and each client’s case is unique. But what I can tell you is to beware of those TV commercials that promise miracles.

The IRS, Federal Trade Commission (FTC) and state attorneys general have cracked down on those companies that offer to resolve your tax debt for “pennies on the dollar.” Beware of any company that uses this or similar language or that promises a resolution in your case. You may find yourself paying excessive fees only to have your OIC rejected or negotiated for only negligibly less than your full debt.

The IRS uses a calculation that determines your monthly disposable income. This amount, in addition to your liquid (or easily liquidated) assets, helps determine how much the IRS will accept for your OIC.

Generally, the more you owe, the more the IRS may agree to discount your debt — assuming you truly do not (or will not) have the capacity to pay during the statutory collection period.