The "Offer In Compromise" (OIC) is a structured Internal Revenue Service (IRS) program. It allows you, the delinquent or non-filing taxpayer, to offer the IRS a smaller amount than the amount you actually owe. If your OIC is accepted, and after you pay the amount accepted by the IRS, your past due tax liability will be totally eliminated.
Also, all questions of tax liability for the years or periods covered by the agreement are conclusively and finally settled. Neither the government or the taxpayer reopen the case unless there was falsification or concealment of assets or a mutual mistake.
Not usually, but don't wait. If the IRS contacts you first, you may not be immune from prosecution. You're better off planning your overall filing and payment strategy with a professional counselor BEFORE the IRS catches up to you.
The OIC program is not new. It has been in existence for a very long time. However, in February 1992, the IRS made significant changes regarding the administration of the OIC program. The IRS instituted a policy known as "Compliance 2000". It's objective: bring voluntary compliance to its highest level by the end of the century, thereby reducing the outstanding tax debt of the billions of dollars which are owed.
An Offer in Compromise can be based on the following two possibilities:
1. Doubt as to Liability. Can you prove that you really do not owe the tax?
2. Doubt as to Collectibility. If you owe past due taxes, is it unlikely that you can pay them in full? Most OICs deal with the Collectibility issue.
On the surface an OIC sounds great, almost like, "Make 'em an offer they can't refuse". But an OFFER IN COMPROMISE is not a simple verbal negotiating process like getting the best price when buying a new car. You just don't walk in and say, "I'll give you $1,000 right now to get this over with". Then the Revenue Officer responds with, "We'll take $8,000". Then you counter at $3,000. After "talking to the manager", the Officer comes back with $6,000 and finally you guys settle on $5,000. No, it doesn't work like that.
An OFFER IN COMPROMISE follows very specific steps. IT'S A PROCESS, and it takes knowledge and experience with the "process" to do it correctly and effectively. It requires documentation, validation, and, most of all, an OFFER IN COMPROMISE REQUIRES TIME. As we said, you just can't walk in and say, "Here's $1,000 to get this over with". BUT WHY NOT?
REMEMBER THE DEFINITION OF A "LIEN"? YOU ARE THE ENTITY UNDER THE LIEN. Effectively the IRS already owns everything you have up to the full amount you owe. So it's up to you to prove that everything you have, if you had to LIQUIDATE ALL OF IT tomorrow, would not be enough to pay the outstanding tax bill. But of course anything having to do with money is not that simple.
There will be other considerations; lot's of them as a matter of fact, which will determine if you can settle the tax debt for less then the full amount. You're playing under their rules and as IRS policy states: "The Service (the IRS) will accept an Offer in Compromise when it is unlikely that the tax liability can be collected in full and the amount offered reasonably reflects collection potential."
Now the question becomes, "WHAT IS REASONABLE COLLECTION POTENTIAL"? And this is where it gets complicated.
Under the law, the IRS has designed its OFFER IN COMPROMISE Program to get as much money as possible from you in any settlement. (WHAT DO YOU EXPECT, IT'S THEIR JOB!) And since it's their job, don't think for a second that they'll be nice guys and give you the information which will help you settle for the least amount possible. They have a fiduciary responsibility and the legal right to get as much as they can from you. Therefore they're not going to disclose the details of how you might settle with them for less then you owe.
A KEY TO SUCCESSFUL SETTLEMENTS IS KNOWING HOW THE IRS EVALUATES "REASONABLE COLLECTION POTENTIAL". This takes specific knowledge of the law and the IRS; its policies, procedures, formulas, Standards, etc., etc., etc. It's a long process which requires documentation to support the financial facts of YOUR life.
For your information, we have included the following as direct quotes from the IRS Administrative Manuals.
"The Service, like any other business, will encounter situations where an account receivable cannot be collected in full or there is a dispute as to what is owed. It is an accepted business practice to resolve these collection and liability issues through a compromise. Additionally, the compromise process is available to provide delinquent taxpayers with a fresh start toward future compliance with the tax laws." [Internal Revenue Service's Internal Revenue Manual-Administration, Special Procedures, page 7327, 57(01)1 (2-26-92)]
"The Service will accept an Offer In Compromise when it is unlikely that the tax liability can be collected in full and the amount offered reasonably reflects collection potential. The goal is to achieve collection of what is potentially collectible at the earliest possible time and at the least cost to the government." [Internal Revenue Service's Internal Revenue Manual-Administration, Special Procedures, page 7327, 57(01)1.1 (2-26-92)]
"(1) To resolve accounts receivable which cannot be collected in full or on which there is a legitimate dispute as to what is owed.
"(2) To effect collection of what could reasonably be collected at the earliest time possible and at the least cost to the government.
"(3) To give taxpayers a fresh start to enable them to voluntarily comply with the tax laws.
"(4) To collect funds which may not be collectible through any other means." [Internal Revenue Service's Internal Revenue Manual-Administration, Special Procedures, page 7327, 57(01)1.2 (2-26-92)]