If you owe more in back taxes than you have in assets and income, the IRS may provide a remedy. 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. However, there are strict requirements for an OIC and they are only granted in limited cases. The most common ground for an OIC is if there is doubt as to the collectability of the tax debt.
An OIC on the basis of doubt as to collectability allows a taxpayer to “compromise” a liability if the taxpayer’s assets and income are less than the full amount of the liability. In making that determination, the IRS usually looks at whether the amount offered reflects the reasonable collection potential (“RCP”) of the debt.
RCP is defined as “the amount that can be collected from all available means, including administrative and judicial collection remedies.” The taxpayer’s RCP is the sum of these amounts:
- The IRS looks at the amount collectible from the taxpayer’s net realizable equity in assets.
- Future income. This is the amount collectible from the taxpayer’s expected future income after allowing for payment of necessary living expenses.
- Amounts collectible from third parties. The amount the IRS could reasonably expect to collect from third parties through administrative or judicial actions is included.
- Assets and/or income that are available to the taxpayer but are beyond the reach of the government. For example, assets to which a lien will not attach, such as equity in assets located outside the country, are still considered in determining the RCP.
In determining the taxpayer’s future ability to pay, the IRS must consider the taxpayer’s overall general situation including such factors as age, health, marital status, number and age of dependents, education or occupational training, work experience, and present and future employment status.
To determine the RCP of a taxpayer, the taxpayer must complete and file (as appropriate) Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals, or Form 433-B (OIC), Collection Information Statement for Businesses, with supporting documentation to substantiate the taxpayer’s assets, liabilities, income, and necessary living expenses. For an OIC on the ground of doubt as to collectability and a determination of economic hardship, the taxpayer must also submit Form 656, Offer in Compromise.
Be aware that the IRS usually conducts an intensive review of a taxpayer’s current financial status before considering acceptance of an OIC. Offers will not be accepted where the tax can be paid in full as a lump sum or can be paid under current installment agreement (IA) guidelines unless special circumstances are identified that warrant consideration of a lesser amount. For more detailed instructions on submitting an offer, taxpayers can consult the IRS Offer in Compromise Booklet. It is important to note that while an offer is pending, a Notice of Federal Tax Lien may be filed, but all other collection activities are suspended.
If you owe back taxes, contact us to find out if an Offer in Compromise is right for you.