The offer in compromise program is one method for taxpayers to resolve a tax debt liability with the Internal Revenue Service. There are three situations where an offer in compromise may be accepted: doubt as to collectability, doubt as to liability, and effective tax administration. In preparing an offer in compromise, the taxpayer must disclose all assets and sources of income. The IRS will verify this information and evaluate the chances of collecting from the taxpayer in determining whether or not to accept an offer in compromise. There is no guarantee that the government will accept your offer in compromise. In fact, less than 25% of offers made are accepted.
- In general, an offer in compromise will not be accepted if you can pay the full amount as a lump sum or through an installment plan.
- An offer in compromise will not be accepted unless all tax returns have been filed.
- Only 21% of the offers submitted are accepted by the IRS.
- The average settlement value is $14,296.
An offer in compromise is a program to help taxpayers resolve a tax liability for less than the full amount. An offer in compromise is not available for all taxpayers. In general, only taxpayers who have a tax bill, when compared to the taxpayer’s overall financial situation, that is so large that it is unlikely that the taxpayer will ever be able to pay the total amount, even in the future.
There are three grounds for an offer in compromise: doubt as to liability, doubt as to collectability, and the promotion of effect tax administration.
Doubt as to Liability – Doubt as to liability exists when there is a genuine uncertainty that the amount of tax due is correct. A taxpayer may submit a doubt as to liability offer when (1) it is believed that the examiner made an error in interpreting the tax law, (2) the examiner neglected to consider the taxpayer’s evidence, or (3) the taxpayer has new evidence. The IRS will likely accept a doubt as to liability offer if it proposes a fair amount the IRS could collect if the dispute was taken to trial.
Doubt as to collectability – A taxpayer may submit a doubt as to collectability offer when it is unforeseeable that the taxpayer will ever be able to pay the full amount. In submitting a doubt as to collectability offer, a taxpayer is required to disclose all information about the assets owned by the taxpayer and all sources of income. The IRS will verify all information provided and investigate for other sources of income to determine the reasonable collection potential (RCP). This process is extensive and will require the production of many forms of documentation.
The RCP is calculated based on four components: the assets owned by the taxpayer, the future income of the taxpayer, assets the IRS could collect from third parties, and assets belonging to the taxpayer or income available to the taxpayer but beyond the reach of the IRS. To calculate the value of the assets owned by the taxpayer, the IRS calculates the net realizable equity (NRE) of each asset. The NRE for each asset is 80 percent of the fair market value of the asset minus any amount owed to creditors. Assets include real estate, business property, vehicles, furniture, artwork, jewelry, and other personal property.
The future income of the taxpayer is the amount of the taxpayer expected future income less any amount for necessary living expenses. In general, the IRS will use a taxpayer’s current income as the taxpayer’s potential future income. Unless the taxpayer provides detailed information regarding the necessary living expenses, the necessary living expenses for a taxpayer is determined by using the National Standard Expense, see http://www.irs.gov/individuals/article/0,,id=96543,00.html.
Promotion of Effective Tax Administration – A taxpayer may submit a compromise to promote effective tax administration if collection of the full amount would cause economic hardship. Similar to a doubt as to collectability offer, a taxpayer will be required to submit complete information about their current financial situation. Factors the IRS considers when evaluating an offer to promote effective tax administration are health of the taxpayer, the ability of the taxpayer to support dependents, and whether liquidation of assets available to taxpayer prevent the taxpayer from paying basic living expenses.
Payment Requirements – When a taxpayer files an offer in compromise, the taxpayer must pay a $150 application fee plus part of the offer amount. If the taxpayer offers to pay the tax due in 5 payments or less within 5 years, then the taxpayer must submit 20% of the offer amount. If the taxpayer offers to pay the tax due in installments within 24 months, then the taxpayer must pay the first payment. If the taxpayer offers to pay the tax due in a periodic payment plan longer than 24 months, then the taxpayer must pay the first payment. All payments of the offer must be paid by the taxpayer while the IRS reviews the Offer in Compromise.
Acceptance of Offer – If the IRS accepts the taxpayers’ Offer in Compromise, the IRS will mail a written notice of acceptance. Acceptance of an offer in compromise will only settle the taxpayers of liability for the tax years and for the amounts as specified in the letter.
Rejection of Offer – If the IRS rejects the taxpayers offer in compromise, the IRS will mail a written notice of rejection stating the reasons for rejection and will include instructions on how to appeal its decision. The taxpayer may appeal the rejection of the offer by submitting an appeal to the IRS Office of Appeals within 30 days after the date on the rejection letter.
- Before submitting an Offer in Compromise, it is important to obtain as much documentation of your financial situation as possible. This includes documentation of home ownership (including mortgage), vehicle ownership and loans, and a list of assets (furniture, jewelry, artwork, etc.).
Frequently Asked Questions
Question: The IRS sent me a notice that I owe $10,000 in back taxes, is an offer in compromise the best solution for me?
Answer: An offer in compromise is only one method of resolving your tax debt liability. In order to qualify, you must be able to provide documentation to the IRS to support the grounds upon which you are seeking the offer in compromise, including, but not limited to, bank records, income and expense records, and health records. The IRS will look at your current financial situation and the property you own and evaluate your anticipated future income in determining whether they feel you can pay the total amount of tax due. If you can pay the full amount over time, an installment agreement may be a better method of resolution.
Question: How do I determine what amount I should offer as a compromise?
Answer: There is no definitive answer as to what will be an acceptable offer by the IRS. There are many factors that the IRS looks out to determine whether an offer is acceptable. Beyond a taxpayer’s complete financial situation, the IRS will consider a person’s age, health, and other circumstances to determine what an acceptable offer is.