An offer in compromise (OIC) is an agreement with the IRS or state taxing authority that settles your tax liabilities for less than the full amount. You should understand that despite the publicized claims of many tax resolution firms it is fairly rare that the IRS will offer to compromise your taxes. Because you must submit a $150 application fee and a check for 20% of your lump sum offer with your application it can be expensive to have your application disapproved or rejected (the IRS keeps the fee and 20% regardless of outcome). A tax attorney can save you money by reviewing your situation to determine in advance your eligibility for tax relief with an OIC. The attorney can help you consider whether you need an installment agreement or “partial payment installment agreement” instead.
A partial payment installment plan (PPIA) is basically a hybrid offer in compromise. However, whereas an OIC is a final agreement with fixed liabilities, a PPIA is open-ended. Under the law the IRS will review a PPIA every two years to determine whether the installment payment should be increased. This doesn’t happen with an OIC. The IRS favors PPIA’s and they are easier to obtain than an OIC. They also don’t have a 20% down requirement.
The IRS can accept an offer in compromise if it is in the best interest of the government. Basically, they need to decide that it is a waste of time for them to pursue you based on their analysis of three criteria:
- There may be a possibility that the IRS made a mistake, either in interpreting the tax law or in considering any documents or other evidence.
- Doubt may exist that you can ever pay the full amount of your tax liability within the time limit the IRS has to collect. See Statute of Limitations for more information on time limits.
- There may be special circumstances that make it extremely unfair to create an economic hardship. An example is a taxpayer with a long-term illness that needs all current income and the equity in assets to live.
An offer in compromise is initiated by completing IRS Form 656. The documents required to complete an OIC are very similar to the documentation required for a bankruptcy petition. A bankruptcy attorney who is also a tax attorney is a good choice for a professional to help you if you are considering an OIC.
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