Does The IRS Usually Accept An Offer In Compromise?

Struggling with overwhelming IRS debt and seeing no way out? Consider an Offer in Compromise (OIC). This plan allows you to propose a reduced payment to the IRS, with the remainder of your debt potentially forgiven.

While an OIC can be a beacon of hope, it’s essential to understand the stringent criteria involved. You must have exhausted all other repayment options and not have filed for bankruptcy.

The IRS considers an OIC in specific situations:

• Doubt as to Collectibility: If there’s uncertainty that the IRS can collect the full amount.
• Doubt as to Liability: If there’s genuine doubt regarding the accuracy of the debt.
• Effective Tax Administration: If the compromise would promote fair tax administration.

The goal of an OIC is to reach a mutually beneficial settlement. It offers taxpayers a fresh start while enabling them to meet future tax obligations voluntarily. For the IRS, it provides a feasible alternative to deeming the debt uncollectible or committing to a prolonged installment plan.

In this chapter, I delve into the detailed requirements for qualifying for an OIC, highlighting the challenges and the low acceptance rate. However, if you think you might be a suitable candidate after reading, don’t hesitate to contact me. With a track record of successfully securing OIC approvals, I am ready to help you evaluate your chances and guide you through the process.

Objectives of an Offer in Compromise

When the IRS accepts an Offer in Compromise (OIC), they aim to achieve several key objectives:

1. Maximize Collections Efficiently: The IRS seeks to collect the maximum amount practicably possible as quickly and cost-effectively as possible.
2. Mutually Beneficial Settlement: The goal is to reach a settlement that serves the best interests of both the government and the taxpayer.
3. Provide a Fresh Start: By accepting an OIC, the IRS gives the taxpayer a clean slate, encouraging voluntary compliance with future tax obligations.
4. Secure Otherwise Uncollectible Revenue: The IRS aims to secure revenue that would likely remain uncollected through any other means.

Scope and Finality of an Offer in Compromise

An accepted OIC encompasses all taxes, penalties, and interest for the specified years or periods included in the offer. Once the IRS accepts your offer, it is considered final and binding.

However, this finality holds unless there is evidence of fraud, concealment of assets or ability to pay, or significant factual errors. In such cases, the IRS retains the right to reopen the case.

Needed  Requirements

To qualify for an offer in compromise (OIC) with the IRS, certain requirements must be met. The IRS can agree to an OIC if there is doubt as to collectibility, doubt as to liability, or if the compromise fosters effective tax administration.

Doubt as to collectibility arises when the taxpayer is unable to pay the full tax liability, even through installment payments. Doubt as to liability occurs when there is a genuine dispute about the existence or amount of the tax debt. Effective tax administration encompasses situations where payment in full would cause economic hardship or where exceptional circumstances exist.

It’s important to note that the IRS will only consider effective tax administration under exceptional circumstances or if the taxpayer would face economic hardship otherwise. Additionally, the IRS must have already assessed the tax liability to accept an OIC, although this does not prevent them from considering an offer before assessment.

Addressing Doubts Regarding Tax Liability

When there’s uncertainty about the legitimacy, amount, or existence of a tax liability, it’s termed as a “doubt as to liability.” This typically arises when there’s a legitimate dispute under the law regarding the tax amount owed. However, if the liability has been affirmed by a final judgment, a doubt as to liability would not apply. 

To resolve such doubts, the taxpayer must provide sufficient evidence to the IRS supporting the claim that the assessed amount is in question. The IRS evaluates each case individually, and the minimum offer they will accept depends on the circumstances and the level of doubt raised. This process aims to ensure fair treatment and resolve disputes effectively.

Doubt Regarding Collectibility

One common challenge taxpayers face is the inability to pay their assessed tax liability. This situation naturally raises doubt as to the collectibility of the tax debt. To address this, the IRS considers an offer that reflects the taxpayer’s reasonable collection potential (RCP).

The IRS calculates RCP by evaluating the taxpayer’s assets and income, both present and future, in relation to the amount owed. This calculation also takes into account the taxpayer’s basic living expenses, ensuring they can maintain a reasonable standard of living.

During this assessment, the IRS examines whether there are assets that could be transferred to the taxpayer but are beyond the reach of the government or protected by state laws, such as laws governing marital property. When evaluating an offer, the IRS generally looks at the assets and income of a non-liable spouse only if that property could still be collected by the IRS.

For instance, the IRS considers situations where property was transferred to defraud creditors or where state laws allow collection of the taxpayer’s liability from the assets and income of the non-liable spouse (e.g., states with community property laws). In these cases, the IRS evaluates the assets and income of both the taxpayer and the non-liable spouse, up to the point where any further amount would significantly impact their standard of living and that of their dependents.

To ensure taxpayers can meet their basic living needs, the IRS allows them to retain a certain amount based on the National and Local Living expense standards. Additionally, the IRS considers the specific circumstances of each taxpayer to determine an appropriate amount for basic living expenses.

Efficient Tax Management

To support effective tax administration, the IRS may accept an offer to compromise even when the grounds for doubt as to liability or collectibility are absent. This typically occurs in two scenarios:

1. Economic Hardship: The IRS may consider an offer when the entire tax liability can be collected but doing so would create an economic hardship for the taxpayer.
2. Exceptional Circumstances: If exceptional circumstances exist that detrimentally affect the taxpayer’s ability to comply voluntarily, and accepting the offer would not undermine compliance with tax laws, the IRS may also consider a compromise.

It’s important to note that the IRS evaluates each case individually, taking into account all relevant facts and circumstances, including the taxpayer’s compliance history with tax laws. 

Financial Adversity

When evaluating economic hardship for tax liabilities, the IRS considers several key factors. One such factor is the taxpayer’s inability to earn a living due to a long-term illness, medical condition, or disability. In these cases, it must be reasonably foreseeable that the taxpayer’s financial resources will be exhausted while providing care and support during the course of the condition. Additionally, if the taxpayer has monthly income, but it is entirely used for the care of dependents with no other means of support, this is also considered.

Another factor is the taxpayer’s assets. Even if the taxpayer has assets, they may be unable to borrow against the equity in those assets. If liquidation of those assets to pay outstanding tax liabilities would render the taxpayer unable to meet basic living expenses, this is taken into account.

Here are a few hypothetical scenarios to illustrate what circumstances would constitute economic hardship:

1. Long-term Illness: The taxpayer has enough assets to satisfy the tax liability, but provides full-time care and assistance to a dependent child with a serious long-term illness. It is expected that the taxpayer will need to use the equity in their assets to provide for adequate basic living expenses and medical care for the child. The taxpayer’s overall compliance history does not weigh against compromise.
2. Liquidation of Assets: The taxpayer is retired with income only from a pension. Their only asset is a retirement account, which is sufficient to satisfy the liability. However, liquidating the retirement account would leave the taxpayer without an adequate means to provide for basic living expenses. The taxpayer’s overall compliance history does not weigh against compromise.
3. Disability and Fixed Income: The taxpayer is disabled and lives on a fixed income that, after basic living expenses, does not permit full payment of the liability under an installment agreement. They also own a modest house specially equipped to accommodate the disability, with sufficient equity to pay the liability. However, due to the disability and limited earning potential, the taxpayer cannot obtain a mortgage or borrow against this equity. Forced sale of the residence would create severe adverse consequences. The taxpayer’s overall compliance history does not weigh against compromise.

To decide whether a compromise would undermine taxpayer compliance with tax laws, the IRS also considers the taxpayer’s history of compliance with filing and payment obligations, deliberate tax avoidance efforts, and whether the taxpayer has encouraged others to refuse compliance with the tax laws.

To gain a clearer understanding of how taxpayer compliance contributes to exceptional circumstances, consider these two examples: 

Example 1:

In October of 1986, the taxpayer faced a severe illness, leading to extensive hospital stays that rendered them incapable of managing their financial matters. Consequently, the taxpayer did not file tax returns during this period. Now, with improved health, the taxpayer has turned their attention to their tax affairs, only to discover that the IRS had prepared a substitute for return for the 1986 tax year, resulting in a substantial tax deficiency with penalties and interest, totaling more than three times the original liability. Despite this, the taxpayer’s compliance history does not pose an obstacle to compromise.

Example 2:

As a salaried sales manager at a department store, the taxpayer diligently contributed $2,000 annually to a tax-deductible IRA account for the past two years. Seeking to optimize their IRA savings, the taxpayer decided to transfer the funds to a certificate of deposit at a different financial institution, expecting a higher interest rate. Before initiating the transfer, the taxpayer sought guidance from the IRS through an email inquiry on their website, inquiring about the necessary steps to maintain their tax benefits and avoid penalties.

The IRS responded, indicating that the taxpayer could withdraw the IRA savings from their current bank but must redeposit them into a new IRA account within 90 days. Following this advice, the taxpayer withdrew the funds and redeposited them into a new IRA account within 63 days. However, upon audit, the taxpayer was informed that the rollover should have been completed within 60 days, resulting in additional taxes, penalties, and additions to tax.

The taxpayer’s retained copy of the IRS email response clearly showed the erroneous advice received, which led to the rollover occurring outside the required timeframe. Had it not been for this misleading information, the taxpayer would have completed the rollover within the stipulated 60-day period. Notably, the taxpayer’s overall compliance history does not detract from their case for compromise.

Considering an Offer in Compromise? Here’s What You Need to Know

If you’re facing IRS debt that you can’t pay in full, an offer in compromise (OIC) could be a viable solution. However, qualifying for an OIC involves meeting specific conditions, which we’ll outline in this section.

One of the key arguments for an OIC is demonstrating that paying your tax debt would create a financial hardship. While this may seem like a common plea, the IRS requires a compelling case. We’ll discuss the conditions that constitute financial hardship to help you prepare a strong argument.

It’s important to understand that the IRS is inclined to accept an offer if it believes there’s a higher chance of collecting something rather than nothing. They will assess the potential collectibility of your tax debt to determine their willingness to negotiate.

It’s worth noting, though, that the acceptance rate for OICs is relatively low. To improve your chances of approval on your first submission, consider seeking professional assistance.

Conclusion

Economic hardship is a significant consideration when the IRS evaluates an offer in compromise (OIC). If paying your tax debt would lead to severe financial difficulties, you may qualify for an OIC. The IRS takes into account various factors, such as your ability to earn a living due to long-term illness, medical condition, or disability. They also consider whether liquidating assets to pay off the debt would leave you unable to meet basic living expenses. While the IRS aims to collect the maximum amount possible, they also understand the importance of ensuring taxpayers can maintain a reasonable standard of living.

If you’re considering an OIC, it’s crucial to understand the requirements and prepare a strong case. The acceptance rate for OICs is relatively low, but with the right approach, you can improve your chances of approval. Seeking professional assistance can be beneficial, as experienced tax professionals can help you navigate the process and increase your likelihood of success. Austin & Larson Tax Resolution is a full-service tax debt resolution company specializing in OICs. With their expertise, you can effectively present your case to the IRS and work towards resolving your tax debt. Contact them today to discuss your options and take the first step towards financial freedom.