How Does An Offer In Compromise Work?

Many well-meaning taxpayers might find themselves owing more taxes than they paid, leading to a stressful and difficult financial situation. Many of these taxpayers may have heard of an “offer in compromise” (OIC), but not fully understand what that term means or what options surround its use. Today, we’ll answer a few popular questions that our firm receives about OICs: how does an offer in compromise work? What guidelines are necessary to take advantage of it, and when should a tax attorney be retained to help with the process?

What Is An IRS Offer In Compromise (OIC)?

Simply put, an offer in compromise (sometimes shortened to ‘OIC’) is a program that the IRS extends to certain taxpayers who have unpaid tax debt and want to settle their obligation in good faith for less than the total amount owed. That sounds like a great deal — who wouldn’t want to pay less than they owe? — but it’s not exactly that simple. You can’t turn your financial obligation to the IRS into a game of haggling, but you can work with them to provide evidence that paying the full amount is not feasible.

There are several reasons you can put forth to the IRS to show that the full debt is, for all practical purposes, uncollectible. We’ll get into those in the next section, ‘Offer In Compromise Guidelines’. Suffice to say, one of the primary things that the IRS will look at is their “Reasonable Collection Potential” (RCP). That’s essentially their internal metric to determine, realistically, what they will be able to actually obtain from a given taxpayer based on the unique particulars of their financial picture.

Offer In Compromise Guidelines

There are three main qualifying conditions that the IRS will scrutinize to help piece together their determination of a taxpayer’s OIC eligibility. These are: doubt as to liability, doubt as to collectibility, and effective tax administration.

• Doubt as to Liability – If there is any question as to the accuracy of the debt liability, this is something that the IRS will consider while reviewing your offer in compromise. After all, mistakes occasionally are made, and sometimes debtors don’t actually owe the full amount they have been “charged.” If this is the case, the IRS will often approve an OIC in good faith to minimize the liability that is of questionable accuracy.
• Doubt as to Collectibility – The old saying goes, you can’t squeeze blood from a stone. If there is good reason to believe that the full debt will never actually be collectible, it’s smarter for the IRS to accept an offer in compromise that at least has the taxpayer meeting a portion of their legitimate obligation. In these instances, it’s usually in the best interest of both parties to accept an offer in compromise.
• Effective Tax Administration – If repaying the debt is mathematically possible, but would incur undue and intense economic hardship for the taxpayer, the IRS will consider an OIC in these instances as well. After all, it’s not in the best interests of the government to financially cripple their citizens, which only kicks the can down the road and likely will cause other problems in the social economic system down the line. Therefore, this is a viable angle for you or your tax attorney to take when suggesting an offer in compromise to the IRS.

Keep in mind, that even if your offer is accepted based on one of these criteria, there are other factors that still come into play when reviewing your overall financial picture and tax obligation. For instance, an offer in compromise does not have any effect on existing tax liens. The two are separate: only after the OIC amount has been paid can the taxpayer request removal of the IRS lien.

Remember though, that a tax levy is different than a tax lien. In fact, an accepted OIC will indeed stop a tax levy in its tracks while the taxpayer is making good on their OIC commitment. In fact, even if the offer in compromise is rejected, the taxpayer will still get a 30 day reprieve from their existing tax levy in order to sort out their financial plans moving forward.

Finally, be flexible in terms of your expectations when it comes to the timeline of this process. According to the law, the IRS has up to two years to make a decision on your offer in compromise. At the end of the two year period, if they still have not reached a decision in your case, the offer will be automatically accepted. As you can see, many of these laws and regulations surrounding tax debt repayment are actually quite fair for both taxpayer and the government. In fact, as time goes by, the laws surrounding tax debt repayment are getting more and more favorable for the taxpayer.

When To Hire An Offer In Compromise Lawyer

With all this in mind, when should you enlist help with completing offer in compromise papers and procedures? There are several advantages to retaining a qualified tax attorney to help you complete the offer in compromise process.

If you’re the type of person to ignore problems and hope they resolve themselves, you should strongly consider retaining a tax attorney to handle your OIC application. Let’s face it: nobody wants to be dealing with huge unpaid sums and scary letters arriving every few days from the IRS. The stress of the entire process can be enough to send some people burying their heads in the sand in the vain hope that the problem will simply go away. Unfortunately, this is a terrible strategy. The IRS is one of the most aggressive collectors in the world, and they will not simply forget about your outstanding debts. Hiring a tax lawyer lets you have the peace of mind to know that someone else is taking care of the process itself, and that you are taking proactive steps to undo your tax complications.

Additionally, if you’re an extremely busy individual due to work or other obligations keeping you running around during normal business hours, it only makes prudent sense to have a tax attorney be in your corner during the OIC process. We find that many people who are caregivers to small children or the elderly have barely enough time to think during the day, let alone navigate the complex US tax code. In these situations, a tax attorney exists to help you continue to meet the daily obligations of life while making sure that you’re also meeting the obligations of your existing tax debt.

If you have questions about possibly retaining a tax attorney to help you with the offer in compromise (OIC) process, you can always contact the experienced, discreet, and professional tax attorneys at Abajian Law for a no-obligation consultation about your options. Don’t spend any more time pretending your tax debt problem doesn’t exist: take care of it today and feel the freedom that comes with knowing you’re on the road to being tax debt-free.