The Basics of Offers in Compromise
Charles Frazier is a tax attorney who helps business owners and entrepreneurs through audits, tax collection matters, and many other tax situations. We explain in layman's terms to our clients the applicable tax laws and how we can help. If you need help with a tax issue, contact our offices today. Below, we will explain what offers in compromise, which may be a boon to those who owe the IRS back taxes are.
What are Offers in Compromise?
An offer in compromise (OIC) is an agreement between you, the taxpayer, and the Internal Revenue Service that settles your tax liabilities for less than what you owe. In essence, if you are accepted for this program, your tax slate can be wiped completely clean.
An OIC enables the taxpayer to pay a lesser amount in satisfaction of unpaid tax liability, including interest, penalties, and additions to the tax. The OIC program is a way for taxpayers to resolve their tax liability and for the IRS to collect funds that may not be collected through other means.
Liabilities to Be Compromised
An OIC is effective for the entire assessed liability for tax, penalties, and interest for the years or periods covered by the offer. All questions of tax liability for the years or periods covered by the agreement are conclusively settled. Neither the taxpayer nor the IRS can reopen a compromised tax year or period unless there was (a) falsification of information or documents, (b) concealment of ability to pay and/or assets, or (c) a mutual mistake of a material fact sufficient to set aside or reform a contract.
Grounds for Acceptance or Rejection
The IRS will consider an OIC on the following grounds:
- Doubt as to Liability. For this ground to apply, there must be a genuine doubt about the validity of the liability. Since an OIC is a “compromise,” a client making an OIC on doubt as to liability is required to offer some payment, even if he or she believes that no tax liability exists. In deciding what amount to accept, the IRS will weigh the hazards of litigation. The greater the hazard, the greater likelihood that the IRS will accept smaller payments.
- Doubt as to Collectability. An OIC filed on this ground must demonstrate that (a) it is unlikely that the tax can be collected in full within the collection statute of limitations and (b) the OIC reasonably reflects the amount the IRS could collect through other means, including administrative collection remedies. This determination requires a detailed analysis of the taxpayer's net worth and future income potential.
- Promotion of Effective Tax Administration. This option is the most subjective ground for filing an OIC. The IRS may compromise a tax liability on this ground if (a) full collection is possible but would cause the client an economic hardship, or (b) there are no other grounds of compromise, but public policy or equity considerations provide a sufficient basis for compromising the liability.
Who Qualifies for an Offer in Compromise?
- This program is mainly for those who are incapable of paying their tax bill in full because they lack a steady income stream and have little to no equity in their assets. Those who can pay their tax bill in installment payments typically will not qualify for an offer in compromise.
- A taxpayer must have filed all of their taxes to qualify. After all, how will the federal government know you can't pay if they don't know the amount you owe?
- Some payment may be required upfront for you even to apply. This can include paying the current quarter's tax liability.
- Reasonable collection potential (RCP), or your ability to pay your tax liabilities, must be calculated. This can include all of your assets, including cash on hand, property owned, and even cars. Furthermore, future income is often taken into account, minus the cost of living in your area.
Things to Consider Before Submitting for an Offer of Compromise
- An offer in compromise should be one of your last resorts to settle your tax bill. This is not an easy program to qualify for. Proof of your income can take months to approve, with some cases, such as with a business, requiring you to submit boxes of documentation.
- The decision is subjective. The federal government has no legal obligation to compromise or settle with you at all.
- Submitting to this program will bring IRS scrutiny, much more so than if you apply for an installment payment plan.
- Because the IRS now knows your entire financial situation, the IRS now has all the information it needs to accelerate collection efforts against you.
The Law Offices of Charles Frazier recommends you only submit an offer in compromise when you are fairly certain your application will be approved. The IRS offers an online pre-qualifier assessment tool for just this purpose. Another drawback to the offer in compromise program is that interest is still accruing on the amount you owe during the application process, which, as previously stated, can take a while. As almost always with the federal government and IRS processes, you have the right to appeal to a rejected offer.
Charles Frazier is a Nashville lawyer who practices tax law and estate planning. We can help with all of your business tax matters as well as your nonprofit organization's tax-exemption establishment. Our mission is to help you, but only if an OIC is a good solution for you. Contact us today to discuss the best options for resolving your tax problems!