If you can’t afford to pay off your tax debt, you may qualify for an “Offer in Compromise (OIC).” An IRS Offer in Compromise (OIC) is an agreement between the taxpayer and the IRS to settle the taxpayer’s liabilities for less than the full amount owed. An OIC may be a good option if you can’t pay the full tax liability, or where doing so would create a financial hardship. However, the big myth is that you can settle for pennies on the dollar. The truth is that the IRS is going to conduct a comprehensive review to determine how much you can afford. Having the appropriate supporting documentation can make or break an offer so you must take great care in making your case.
The first point to understand is that an OIC is only available where you can demonstrate one of these grounds: (1) Doubt as to liability (you can establish a genuine dispute as to the existence or amount of the correct tax debt under the law); (2) Doubt as to collectability (your assets and income are less than the full amount of the tax liability); or (3) Effective tax administration (you may be able to fully pay the tax, but such payment would cause an economic hardship or there are compelling public policy or equity considerations). The second and third grounds are the ones relied on if you cannot afford your tax debt.
In most cases, the IRS will not accept an offer unless the amount offered is equal to or greater than the reasonable collection potential (“RCP”) of the taxpayer. The RCP measures a taxpayer’s ability to pay their liabilities. It includes amounts that could be realized from the liquidation of the taxpayer’s assets, such as real property, retirement accounts, investment funds, and bank accounts. In addition, the RCP calculation includes the taxpayer’s anticipated future income less amounts allowed by the IRS for reasonable living expenses. In other words, the IRS will look at your unique circumstances including your ability to pay, present and future income, expenses, and all assets, including what you would have if you sold off your real and personal property.
One of the most notable differences between a New York State OIC and an IRS OIC is that the outstanding amount of the tax liability is a factor for New York, but not for the IRS in its calculation of RCP.
When it comes to arguing economic hardship, the individual taxpayer must show he/she is unable to pay reasonable basic living expenses. IRS national standards are used to determine allowable expenses. Documentation may be necessary to support expenses above IRS standards. (e.g., high out of pocket medical expenses, etc.)
While an OIC is a great option that can provide a fresh start from tax liabilities, it is not appropriate for everyone. If you owe taxes and have filed all your tax returns, you should discuss your options with a qualified tax attorney.
To learn more about how to qualify for an OIC, check out our article in Long Island Weekly.