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Offer in Compromise

If you cannot pay your tax debt in full, an Offer in Compromise may allow you to settle your tax debt for less than the full amount owed, however, contrary to what you may have heard on TV, not everyone can settle their tax debt for less than they owe.  You qualify for an Offer in Compromise if your reasonable collection potential (what the IRS determines they can collect from you through ordinary collection action) is less than what you owe.  The IRS determines your reasonable collection potential by calculating how much of your income is available after paying your necessary living expenses added to the amount that would be available if you liquidated your assets. 

Before submitting an Offer in Compromise careful consideration should be given to whether this is the best course of action for you.  In order to submit an Offer, you must disclose all of your financial information to the IRS, thereby, giving them a blueprint to seize your assets should your Offer not be accepted.  Unless you are sure that your circumstances warrant acceptance of an Offer, it would be to your benefit to discuss this with a qualified tax professional prior to submitting an Offer. 

There are three types of Offers in compromise available:

  1. Doubt as to Collectibility - The IRS will accept this type of Offer if after calculating your income over expenses plus the quick sale value of any assets, your reasonable collection potential is less than the amount owed.  Under this category there is also Doubt as to Collectibility with special circumstances.  If you cannot pay your full liability and there are circumstances (usually health issues for you or a dependant) which merit accepting less than your reasonable collection potential an Offer for less will be accepted.
  2. Doubt as to Liability - When there is legitimate doubt that you owe your tax liability you can submit this type of Offer.  If you have already had the opportunity to dispute the tax, you are not eligible for a Doubt as to Liability Offer in Compromise.  There are other avenues that can be utilized when you do not think you owe the tax that has been assessed against you if you do not qualify for this type of Offer.
  3. Effective Tax Administration Offer - This is the most difficult type of Offer to get accepted because you are telling the IRS that you have the funds/assets to pay your liability in full but there is a compelling reason why you should be able to settle your liability for less than the full amount owed.  You must prove to the IRS that you will face a significant financial hardship or it would be inequitable or unfair if you were forced to pay your liability in full.  This type of Offer usually applies when you or your dependant is suffering from a serious medical illness, which will require you to use your financial resources for health care and/or necessary living expenses.  This usually means the IRS is allowing you to exceed the national standards because you have shown that you have a compelling reason to spend more than the amount normally allowed.  Or in the case of an asset, that by forcing liquidation of your home, automobile, savings account, etc. you would be homeless, unable to get to work or to doctor's appointments, or be unable to pay your expenses in the future.  While this is a very difficult type of Offer to get approved, I have successfully negotiated Effective Tax Administration Offers for clients affected by exceptional circumstances.

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