Tax Debt Compromise Program: 10 Things You Should Know

August 30, 2022 by Steve Banner, EA, MBA
Offer in Compromise

It would be safe to say that there are very few – if any – people in this world who would enjoy finding themselves in a position where they have an outstanding tax debt with the U.S. Internal Revenue Service that they cannot pay right away in full. As we have seen in prior articles on this site, the IRS offers a few different programs which allow taxpayers to settle their debt over time with a series of payments by installments. However, there are some cases where these programs are not a good fit. Taxpayers who lack the ability or earning capacity to take advantage of the installment system to eventually pay the full amount owed need another alternative. In recognition of this fact, the IRS operates an Offer in Compromise program to allow certain qualified taxpayers to settle their tax debt for less than the full amount owed.

Of course, the IRS would prefer that all taxpayers pay their full debt – whether that is immediately or over time in installments – but for some taxpayers, this would cause an unreasonable financial hardship. Or for others, the small amount they might be able to pay by installment would mean it would take more years than the statute of limitations allows to resolve their debt. Generally, the IRS has ten years from the date the tax debt is assessed to collect the balance due. We can see right away that the idea of a negotiated reduction in the debt owed would be extremely attractive to any indebted taxpayer (thus the popularity of those late-night TV commercials, advertising “I’ll help you settle your tax debt for pennies on the dollar!”). However, the IRS has strict guidelines about the use of the Offer in Compromise (OIC) program, screening all applicants to ensure that the program is used only by those taxpayers who genuinely fit the program’s criteria. The responsibility is on taxpayers who apply to demonstrate they meet the requirements of the program. Submitting the application for OIC on its own does not ensure that the IRS will accept the offer. Instead, the submission of the application marks the beginning of the evaluation and verification process.

Having said that, these are the top ten things you should know if you are considering applying for an Offer in Compromise to settle your tax debts:

 

  1. Just as the installment programs are not suitable for all taxpayers, the Offer in Compromise program is not intended for everyone. Before you submit an Offer in Compromise, you should review the other payment options offered by the IRS to settle your debt.
     
  2. You must be current with all your tax filings and must have made all estimated tax payments that are due on your current tax return. If you are an employer, you must have paid all your tax deposits for the current and past two payroll quarters.
     
  3. You would not be eligible for an Offer in Compromise if you have already initiated bankruptcy proceedings. However, you may be able to settle your tax debt through the bankruptcy court.
     
  4. OICs are available only for tax years or periods where the tax has been assessed. Any tax years or periods that have not been assessed are not eligible.
     
  5. As part of your application for an Offer in Compromise, you must complete an IRS Collection Information Statement. The purpose of this statement is to provide extensive and detailed personal and financial information to the IRS.
     
  6. In reviewing your application, the IRS will consider your unique set of facts and circumstances, including your:
     
    • Ability to pay
    • Income
    • Expenses
    • Asset equity

     
  7. Based on the facts and circumstances and the information provided by the taxpayer, the IRS generally approves an Offer in Compromise when the amount offered by the taxpayer represents the most the IRS can expect to collect within a reasonable period of time.
     
  8. Do not think that the IRS will automatically accept your application. According to sources in the community of tax professionals, the IRS acceptance rate for OIC applications in 2021 was 31%.
     
  9. Using the Offer In Compromise Pre-Qualifier tool can provide a very useful guide to help you understand whether you may be eligible to participate in the OIC program.
     
  10. You must pay an application fee with the submission of the application, unless you qualify under the provisions available for “low income” taxpayers, generally defined as someone whose income falls below poverty levels. Low-income certification is included in the application process.

If you are interested in learning more about Offers in Compromise, the IRS website offers a good deal of information about the process and the steps required to apply. However, it can be extremely difficult for taxpayers to manage their application for an Offer in Compromise on their own because of the complex interactions between personal and tax issues that are involved. But our team here at TaxAudit offers a confidential, cost-free, obligation-free consultation with an experienced tax professional to help indebted taxpayers understand their available options. Additionally, we also offer representation services to help those who decide they would rather not face the IRS alone.

More information about the IRS Offer in Compromise program and the related services offered by TaxAudit can be found in this short video presented by our leading tax attorney and Director of Tax Services.

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