The Offer in Compromise is an agreement between the taxpayer and the government to permanently settle a tax debt for an amount that is less then what is owed. The decision to settle is most often based on the IRS' belief that full collection of the liability in the future is unlikely.. based on the taxpayer's “reasonable collection potential”. This reasonable collection standard is based on a formula that uses the facts and circumstances of the individual taxpayer.
There are three types of offers in compromise:
Offers based on doubt as to collectability
Where doubt exists that the full amount can be paid within the statute period, the IRS must review the taxpayer's assets, debts, income and budget to determine the reasonable collection potential referenced above.
Offers based on doubt as to liability
If the taxpayer doubts that the assessed tax is correct, he or she can file an offer in compromise and challenge the assessment. This offer must be carefully drafted and provide full documentation of the proof that exists that support the argument. When successful, the taxpayer may avoid paying certain taxes that were unfairly or incorrectly assessed.
Offers based on effective tax administration
These offers are made when a taxpayer agrees with the amount that the IRS claims is owed and would be able to pay it in full; BUT an exceptional circumstance exists that would create an economic hardship, inequity or an unfair situation if the tax were paid.
OFFER IN COMPROMISE: THE PROCESS
The process required to analyze, prepare, and submit an offer in compromise and then to obtain a final agreement can be very complex and time consuming. The success a taxpayer might have had can be undermined by the failure to understand a minor detail, regulation, procedure or guideline.
Not only must procedure be followed by the taxpayer, he or she must provide a detailed financial statement with proof of income, budget, and assets. These documents must often be updated, as the offer process progresses.
The IRS will review the proposal and documents, and compare the numbers to their own basic standards to compute what it believes to be the reasonable collection potential of the taxpayer.
If the IRS rejects the Offer in Compromise, the taxpayer may appeal the decision or propose an alternative collection method like a partial pay installment agreement.
If the Offer in Compromise is accepted either on its face or following negotiation or appeal, the taxpayer must make the payments according to the accepted offer's terms after which the remaining debt is removed and the lien is released AND the taxpayer must remain compliant i.e. file all tax returns for 5 years. If any requirement isn't completed, the offer will be annulled and all delinquent amounts will again be owed with interest.
In the past, most with serious tax debt didn't make good candidates for the IRS Offer in Compromise program. Recent changes to the program may make it easier from many to qualify.