An offer in compromise (OIC) is a type of agreement between both the taxpayer and the Internal Revenue Service outlining and settling the taxpayer’s tax liabilities for less than the current balance due owed. If the taxpayer’s liabilities can be fully paid through the utilization of an installment agreement or any other related means, then the taxpayer would not ordinarily be eligible for an OIC.
To be eligible for the offer in compromise program, the taxpayer must have already filed all tax returns, made the required estimated tax payments for the current year, and made also all required federal tax deposits for the current quarter (IRS.gov, “Topic 204 – Offers in Compromise,” 8/21/2013). Federal tax deposits are specific to business owners with employees.
The IRS provides all of the tools necessary for taxpayers to pursue multiple options with regard to settling taxpayer liability. However, at times, taxpayers will seek the advice of supposed knowledgeable professionals only to discover that they could have negotiated the process themselves. There are two cases that provide insight into some of the abuses taxpayers have experienced as a result of trusting tax professionals. These two cases also provide insight concerning the need for taxpayers to become more knowledgeable about the process of paying taxes.
The Offer in Compromise Process
Taxpayers currently in an open bankruptcy proceeding will not be eligible for an offer in compromise. Tax liabilities and other financial debts are resolved through the process of bankruptcy only. If you do not fall under this category, then the IRS will accept an offer in compromise on three grounds. First, if you have genuine doubt with regard to your tax liability, then you will need to complete Form 656-L, Offer in Compromise (Doubt as to Liability).
Second, acceptance of an offer in compromise will be permitted if it is determined that the amount you owe is fully collectible. Lastly, “an offer may be accepted based on effective tax administration when there is no doubt that the tax is legally owed and that the full amount owed can be collected, but requiring payment in full would either create an economic hardship or would be unfair and inequitable because of exceptional circumstances” (“Topic 204”). In addition to submitting Form 656-L, taxpayers must also complete and submit Form 433-B (OIC), Collection Information Statement for Businesses.
It is important to note that penalties and interest will continue to accrue during the evaluation process. You must only submit an offer for tax years that have been assessed by the IRS. The taxpayer must submit all required forms and fees as part of the application process. The IRS offers guidance that provides insight into the process as well as application materials.
How Much Should I Offer? Minimum Offer Amount and Reasonable Collection Potential
Determining how much you should offer, whether minimum or maximum, is predicated on your understanding of the two types of offers and payment options the IRS will accept.