An offer in compromise (OIC) is an agreement between a taxpayer and the Internal Revenue Service that settles a taxpayer’s tax liabilities for less than the full amount owed. That’s the good news. The bad news is that not everyone can use this option to settle tax debt; the IRS rejected nearly 60 percent of taxpayer-requested offers in compromise. If you owe money to the IRS and wonder if an IRS offer in compromise is the answer, here’s what you need to know.
Who is Eligible?
If you can’t pay your full tax liability or to do so creates a financial hardship, an offer in compromise may be a legitimate option. However, it is not for everyone, and taxpayers should explore all other payment options before submitting an offer in compromise to the IRS. Taxpayers who can fully pay the liabilities through an installment agreement or other means generally won’t qualify for an OIC.
To qualify for an OIC, the taxpayer must have:
- Filed all tax returns.
- Made all required estimated tax payments for the current year.
- Made all required federal tax deposits for the current quarter if the taxpayer is a business owner with employees.
IRS Acceptance Criteria
Whether your offer in compromise is accepted depends on several factors; however, typically, an offer in compromise is accepted when the amount offered represents the most the IRS can expect to collect within a reasonable time frame – referred to as the reasonable collection potential (RCP). In most cases, the IRS won’t accept an OIC unless the amount offered by a taxpayer is equal to or greater than the reasonable collection potential (RCP), which is how the IRS measures the taxpayer’s ability to pay.
The RCP is defined as the value that can be realized from the taxpayer’s assets, such as real property, automobiles, bank accounts, and other property. In addition to the property, the RCP also includes anticipated future income minus certain amounts allowed for basic living expenses.