What is an OIC
IRS has a program that is known as an “Offer in Compromise” which is authorized under Internal Revenue Code Section 7122 and Treasury Regulation Sec 301-7122-1. These sections of the tax law provide the Secretary of Treasury the broad authority to compromise tax liabilities.
The Internal Revenue Service understands that there are certain situations and circumstances which prevents a taxpayer from paying their tax debt in full and it is an accepted business practice to resolve these issues through a compromise. Under an Offer in Compromise program a taxpayer is able to settle their tax debt for less then full payment. However, not every taxpayer qualifies for an Offer in Compromise. The IRS will not accept an OIC if the tax liability can be paid in full as a lump sum payment or through a payment agreement. Based upon the last set of data from 2019, only 33% of OICs were accepted because they met the requirements of the IRS.
What are the Initial Qualifications of an OIC?
For a taxpayer to even initially qualify for an OIC, they must be ‘current' in the tax filing requirements with the IRS. This means they must have filed all of their tax returns. For example, if a taxpayer files an OIC in 2020 but they never filed their 2018 tax return, then the taxpayer is not current and the OIC will be automatically rejected.
Being ‘current' also means that if the taxpayer is required to make estimated tax payments then they must do so. Otherwise they will not be considered ‘current' and the OIC will be automatically rejected.
If an OIC is being submitted on behalf of a business, then they must be current with all the various tax filings of a business. This includes not only corporate and payroll tax returns but also excise tax returns or Heavy Highway Vehicle Use Tax Returns (if the business is a type that must file these returns). If one of these tax returns is missing, then the OIC will be automatically rejected.
Reasonable Collection Potential (RCP)
For the IRS to accept an OIC, the amount offered by the taxpayer must equal or exceed what the IRS determines to be the ‘Reasonable Collection Potential'. A taxpayer will have to submit a variety of financial information to the IRS including a Collection Information Statement with related supporting documentation.
These documents must document the monthly income, monthly expenses and the assets that are owned by the taxpayer. Based upon this information, the service will calculate the RCP for that taxpayer. If the amount the taxpayer is offering to pay to settle the debt equals the RCP, then the IRS will accept the OIC.
An Offer in Compromise with the IRS is a very time consuming and detailed process that 2/3 of taxpayers are not successful in obtaining. This is often the result of lack of properly preparing for an OIC or by so called professionals who are not honest with their clients.
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