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Tax Help FAQs: Offers in Compromise

What is an Offer in Compromise?

An offer in compromise is an agreement between a taxpayer and the Internal Revenue Service that resolves the taxpayer's tax liability.

The IRS Offer in Compromise (OIC) program was established by the U.S. Congress to help taxpayers who have experienced significant financial problems to get a fresh start. Back tax liabilities, penalties and interest can be settled. All federal tax liens can be released once the IRS accepts the OIC and the negotiated settlement amount is paid.

If you qualify for the OIC program, you can save thousands of dollars in taxes, penalties and interest. Taxpayers can negotiate settlements on all types of taxes, including most payroll taxes, penalties, and interest.

The OIC program provides taxpayers who owe the IRS more than they could ever afford to pay, the opportunity to pay a small amount as a full and final payment.

The IRS has the authority to settle, or compromise, federal tax liabilities by accepting less than full payment under certain circumstances.

The IRS may legally compromise for one of the following reasons:

• Doubt exists that the assessed tax is correct.
• Doubt exists that the taxpayer could ever pay the full amount of tax owed.
• The minimum offer amount must generally be equal to (or greater than) the taxpayer's reasonable collection potential (RCP).
• The RCP is defined as the total of the taxpayer's realizable value in real and personal assets, plus his/her future income.
• Unless the taxpayer files an Offer In Compromise claiming special circumstances, the offered amount must equal or exceed the reasonable collection potential.
• Realizable value is the asset's quick sale value (amount which could be reasonably expected through the sale of the asset) minus what the taxpayer owes to a secured creditor.
  
  Effective Tax Administration
  
  
• There is no doubt that the tax is correct and no doubt that the amount owed could be collected in full, but exceptional circumstances exist such that collection of the full amount would create economic hardship or where compelling public policy or equity considerations provide sufficient basis for compromise.
• The taxpayer bears the burden of proof to show their Offer In Compromise qualifies for public policy or equity considerations.
• They must show that their circumstances are compelling enough to justify acceptance of their Offer In Compromise compared to other taxpayers in similar circumstances.
  
  What do you have to do to be eligible for an Offer In Compromise?
  
  To be eligible for an Offer In Compromise, all returns that are due must first be filed.
  
  What happens if the IRS accepts an Offer In Compromise?
  
  If an Offer In Compromise is accepted, the following guidelines apply:
  
  
• The taxpayer must pay the Offer In Compromise amount in accordance with the acceptance agreement.
• The IRS will keep any tax refund, including interest due, as the result of an overpayment of any tax or other liability for the tax period extending through the calendar year the IRS accepts the Offer In Compromise.
• A taxpayer may not designate a refund and/or overpayment to be applied to estimated tax payments for the following year. This condition does not apply if the Offer In Compromise is based on Doubt as to Liability only.
• The taxpayer will waive their right to contest in court or otherwise, the amount of the tax liability.
• If a Notice of Federal Tax Lien has been filed against a taxpayer, the IRS will release the lien once all payment terms of the Offer In Compromise are satisfied.
• The taxpayer must remain in compliance with filing and payment of all tax returns for a period of five years from the date the Offer In Compromise is accepted or until the Offer In Compromise is paid in full, whichever is longer.
• Failure to pay the Offer In Compromise on time, and/or to remain in compliance during the five-year period or until the Offer In Compromise is paid in full, whichever is longer, will result in the Offer In Compromise being declared in default.
  
  What happens if the IRS does not accept an Offer In Compromise?
  
  
• Once the IRS determines it cannot accept an Offer In Compromise, the taxpayer will be advised of the reasons behind the decision.
• The taxpayer will be afforded another opportunity to submit additional information that might cause the IRS to reconsider its preliminary decision to reject the offer.
• The exception to this is when the taxpayer has an ability to satisfy the liability in full and has not pointed to special circumstances.
  
  How much interest am I going to pay if my Offer In Compromise is accepted?
  
  
• Interest will not accrue on the taxpayer's accepted Offer In Compromise amount from the date of acceptance until the Offer In Compromise is paid.
• Interest and penalties will continue to accrue on the unpaid tax liability while the Offer In Compromise is under consideration.
  
  Will I be entitled to receive tax refunds if my Offer In Compromise is accepted?
  
  
• The IRS will keep any refund, including interest due, because of an overpayment of any tax or other liability, for tax periods extending through the calendar year the IRS accepts an Offer In Compromise.
  
  Is a tax lien released when an Offer In Compromise is accepted?
  
  
• The IRS releases a Notice of Federal Tax Lien when all of the Offer In Compromise payment terms are satisfied.
• For an immediate release of a lien, a taxpayer can submit payment using a certified check and include a request letter.
  
  What happens if I default my Offer In Compromise?
  
  The IRS may take the following actions:
  
  
• Immediately file suit to collect an amount equal to the original amount of the tax liability as liquidating damages, minus any payment already received under the terms of the Offer In Compromise
• Immediately file suit to collect an amount equal to the original amount of the tax liability as liquidating damages, minus any payment already received under the terms of the Offer In Compromise
• Disregard the amount of the Offer In Compromise and apply all amounts already paid under the Offer In Compromise against the original amount of the tax liability
• File suit or levy to collect the original amount of the tax liability, without further notice
  The IRS will not default an agreement when taxpayers have filed a joint Offer In Compromise with your spouse or ex-spouse, as long as you have kept, or are keeping, all the terms of the agreement, even if your spouse or ex-spouse violates the future compliance provision.
  
  What happens if I do not file my tax return or pay my taxes next year?
  
  The Offer In Compromise will be defaulted.
  
  
• An Offer In Compromise requires future compliance for a period of five (5) years from the date of acceptance of the Offer In Compromise, or until the offered amount is paid in full, whichever is longer.