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The Offer in Compromise Process

An Offer in Compromise (OIC) is a tax settlement, where taxpayers can settle their tax liabilities with the IRS for less than the balance owed. The government and the taxpayer enter into an agreement where the taxpayer agrees to pay a fixed amount and also agrees to pay all tax liabilities in full over the next five years. In exchange for this promise of compliance, the IRS will forgive all of the taxpayer’s liabilities provided they abide by the terms of the Offer in Compromise.

There are some common misconceptions about the Offer in Compromise program. Many taxpayers, inundated by the ads they have seen on television, falsely believe that they can simply negotiate with the IRS to reduce their tax liability. Unfortunately, all settlements with the IRS for assessed liabilities have to be negotiated through an Offer in Compromise where the taxpayer makes a formal offer to settle their liability.

Another popular misconception is that anyone can participate in the Offer in Compromise program. However, in most cases, the IRS will not accept an offer unless the amount being offered is equal to or greater than a taxpayer’s reasonable collection potential (RCP). RCP is calculated by the IRS using a specific formula and is how the IRS measures the taxpayer’s ability to pay. The RCP determines the net realizable equity in the taxpayer’s assets, such as real property, automobiles, bank accounts, and other property. In addition to property, the RCP also includes anticipated future income, less certain amounts allowed for basic living expenses, and retired debt, which is debt that will be phased out after a certain amount of time. Taxpayers that the IRS believes will be able to pay their liability in full because of their net realizable equity exceeds the amount of the liability will not have their offers accepted.

Offer in Compromise acceptances are based on three grounds: doubt as to collectability (the most common), doubt as to liability, and effective tax administration. Doubt as to collectability is where the taxpayer’s assets and income are less than the full amount of the tax owed and genuine doubt exists that the tax is collectible. Doubt as to liability is only met when there is sufficient dispute on whether the IRS has correctly determined the amount owed or has assessed the proper person (this often is utilized in innocent spouse cases). Finally, effective tax administration is based on the principal that there is no doubt that the liability is owed or that it can be paid, but that paying the liability would create an unfair economic hardship on the taxpayer or is otherwise unfair based on the taxpayer’s extenuating circumstances.

Taxpayers are urged to speak with a qualified tax attorney about their circumstances prior to submitting an offer in compromise. The IRS accepts less than a quarter (25%) of the offers it receives and it is very important that taxpayers receive assistance in presenting their financials in a manner that would give them the most benefit as well as articulates reasons for the government to accept their offer. In addition, our office prequalifies all of our offers and will only submit offers in compromise that we believe will be successful during IRS review. This is one of the many reasons that our firm has such an excellent track record in the Offer in Compromise process.

If you have any questions or if we can further assist you, please contact our San Diego, Orange County or Beverly Hills tax law firm.

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