Requirements of an Offer in Compromise

Image of TAX words in red

With proper qualifications, the IRS allows individuals who owe federal taxes the opportunity to settle the tax liability for a flat sum. An attorney practicing in tax law can explain federal regulations and what is necessary to qualify for an offer in compromise. Although taxpayers may want an Offer in Compromise, not everyone is a good candidate.

What is an Offer in Compromise?

For qualified taxpayers who have a tax liability, the IRS can set up an agreement, an offer in compromise (OIC), with the taxpayer that allows the tax liability to be settled for less than the full amount owed. Typically, a taxpayer will not be granted an offer in compromise unless the proposed settlement amount is equal to or greater than an amount that can reasonably collected. The IRS measures a taxpayer’s ability to pay the settlement amount by evaluating his/her assets, such as real property, other property, automobiles, and bank accounts. The IRS may also evaluate the anticipated future income of the taxpayer, less certain amounts allowed for basic living expenses.

What are the Qualifications?

To qualify for an OIC, a taxpayer must meet specific requirements:

  • The taxpayer must have filed all necessary tax returns for the current year
  • The taxpayer must have made all estimated current year tax payments
  • If the taxpayer is a business owner with employees, he/she must have paid all required tax deposits for the current quarter

For a qualifying taxpayer, there’s an application fee of $186. If the offer in compromise is based on doubt of liability, or an individual taxpayer qualifies for low-income under federal poverty guidelines, the application fee is waived.

Regulations for Acceptance

If a taxpayer qualifies for an OIC, there are three regulations than govern acceptance:

  • Doubt of Liability – If there is a genuine dispute concerning the correct amount of federal tax owed, the IRS can accept a compromise.
  • Doubt of Collectibility – If the taxpayer’s income and assets are less than the full amount of tax owed, the IRS can accept a compromise based on the fact that the tax liability can’t be collected.
  • Effective Tax Administration – If the IRS determines that the taxpayer owes the tax and has the ability to pay, but payment in full would create an economic hardship for the taxpayer, they can accept a compromise.

If the IRS accepts an offer in compromise, the taxpayer must fully comply with tax laws and avoid further tax delinquencies. If acceptance terms are not met, the IRS can place the OIC in default, consider the agreement null and void, and collect the entire amount of the tax liability, less payments made, plus interest and penalties. The IRS can also apply current tax refunds to the tax liability. If an offer is accepted based on doubt of collectibility or effective tax administration, the taxpayer must file timely tax returns and pay taxes owed in a timely manner for five years from the date of the OIC acceptance.

Are Payment Terms Accepted?

Typically, taxpayers who have the ability to pay the tax liability in full or through an installment agreement will not qualify for an offer in compromise. Individuals who do qualify have two payment options.

Lump Sum Cash Offer

If the taxpayer selects the lump sum cash option, he/she may pay the tax amount owed per the OIC agreement in a lump sum or installment payments. When paid in installments, the total amount owed must be paid within five months after the offer is accepted by the IRS. A non-refundable payment equal to 20 percent of the tax liability must be paid with the OIC application.

Periodic Payment Offer

If the taxpayer selects the periodic payment option, the tax liability can be paid in six or more monthly installments, but not to exceed a 24 month period after the offer is accepted by the IRS. The first installment payment must be paid with the application and is non-refundable. During the IRS evaluation period, the taxpayer must continue to make installment payments, which are also non-refundable.

What if the OIC is Rejected?

If the IRS rejects an offer in compromise, the taxpayer has the right to appeal through the IRS Office of Appeals. When an offer is rejected, the IRS notifies the taxpayer by mail. The letter explains the reason for OIC rejection and outlines necessary steps to take to file an appeal. The appeal must be made within 30 days from the date of the letter.

In certain cases, an OIC may be returned to the taxpayer rather than rejected. This can occur if the taxpayer fails to submit necessary information; fails to include the required application fee or first payment with the application; has not filed required tax returns; has not paid current tax liabilities; or files for bankruptcy. If the IRS returns an OIC to the taxpayer, there is no right to appeal, but the taxpayer can submit another offer.