Offer in compromise

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The Offer in Compromise (or OIC) program, in the United States, is an Internal Revenue Service (IRS) program under 26 U.S.C. § 7122 which allows qualified individuals with an unpaid tax debt to negotiate a settled amount that is less than the total owed in order to clear the debt.

1 Qualifying conditions
- 1.1 Doubt As To Collectibility
- 1.2 Lowest Acceptable Offer
2 Partial Payment
3 Scams
4 Notes
5 References

[edit] Qualifying conditions

One of three conditions must be met in order to qualify for consideration of an OIC settlement:

Doubt as to Liability — Debtor can show reason for doubt that the assessed tax liability is correct
Doubt as to Collectibility — Debtor can show that the debt is likely uncollectable in full by the IRS under any circumstances
Effective Tax Administration — Debtor does not contest liability or collectibility but can demonstrate extenuating or special circumstances that the collection of the debt would "create an economic hardship or would be unfair and inequitable."

[edit] Doubt As To Collectibility

This is by far the most common, simply put you will never be able to pay your tax bill. The IRS will accept a settlement based on the following formula:

Settlement Amount = 60 months of disposable income + the equity in all of your assets.

If you think you qualify, you should first complete a financial statement provided by the Internal Revenue Service. You can use Form 433-A if you are an individual, and Form 433-B if you are a business. These financial statements will allow you to outline everything you own, and create a monthly income and expense table.

Your disposable income is your monthly income minus your monthly expenses. For our example, let's say your disposable income is $100. You multiply that by 60 months (five years) and you get $6,000. That is your minimum offer (so far).

Now you also have to add in your equity in assets. Let's say you own a house that is worth $200,000 and you only owe $180,000. In this case you have $20,000 in equity. This must also be added to your Offer.

Your total offer in this simplified situation would be $20,000 + $6,000, or $26,000. What's that you say? You don't owe that much? Then you are not a candidate for the Offer in Compromise program. But if you owe, say, $100,000 then this is a great deal.

However, as is usually the case, things are not this simple. If you can make a cash offer, that is pay what you offer in 90 days or less, than you use a factor of 48, not 60 months as indicated above. Therefore, the minimum amount of your offer based on your income would be $100 time 48, or $4,800.

Let's say that you also convince the IRS that your house could not be sold on the market that quickly or that there are other problems with a potential market sale. Then, you could ask for a discount to "Quick Sale Value," or QSV, instead of Fair Market Value, FMV. Your house in now valued at a discount to 80% of FMV, or $160,000. In the above example. Because your QSV is less than what you owe on the house, and assuming you have no other assets, your actual potentially acceptable offer is $4,800 plus $0, or just $4,800.

Now let's say that you cannot pay the $4,800 within 90 days. You could offer to pay the original $6,000 listed above within 24 months: for example, at the rate of $250 per month for 24 months.

If you cannot even do that, there is yet a third way to pay. You can offer to pay your monthly net income after allowable expenses (as determined by the IRS) over the life of the remaining statute on collection (originally 10 years). Lets say, you can pay $100 per month and there is 7 years (84 months) remaining on the statute. Then you will pay $100 per month for 7 years or $8,400.

If you owe more than $8,400 in tax, penalty and interest, and your offer is accepted, then you have a good deal. If you owe less, its not a good deal; in fact, it will not be an offer that the IRS will accept. You would be better off asking for an installment agreement at $100 a month until your account is satisfied.

[edit] Lowest Acceptable Offer

The above formula may be applicable in cases where you owe a very large sum and you have a significant amount of disposable income. However, "doubt as to collectibility" implies the inability to pay. The IRS has been known to accept offers in compromise as low as 10%, 1%, and $1 (One Dollar), but this is, as you can imagine, very rare.

If your disposable income is $0, you do not expect to have disposable income for some years, you have special circumtances, you have zero assets and if paying this debt would cause a hardship, the IRS has been known to accept ONE DOLLAR to settle your tax liability through the Offer In Compromise. Said provision takes effect 60 days after the signing.

In a recently accepted "Offer in Compromise" filed in 2006, a family experienced the disability of the primary wage-earner. The tax liability was incurred in 1994, and had been accruing interest and penalties (leading to thousands of dollars in tax liability.) The OIC form filed by the family included the required Form 433, Collection Information Statement and expense information (less than the accepted standard expense allowances for OIC formulation), as well as the fee waiver form that is applicable in low-income cases (this waives the otherwise required $150 OIC processing fee.) Because the family's expenses exceeded their income, the disability of the wage-earner and the lack of saleable assets, the IRS accepted their original offer of $1.

Recent tax legislation, require a taxpayer to make a 20% good faith payment with the offer-in-compromise. If the offer is rejected, the IRS can keep the 20% deposit. Caveat: Underestimating Reasonable Collection Potential

[edit] Partial Payment

Effective July 15, 2006, the IRS made changes to the Offer in Compromise program requiring that an up-front twenty percent, non-refundable payment plus USD$150 be submitted along with the Offer of Compromise. An Offer submitted without the fees is subject to rejections without appeal. After the IRS receives the Offer, they have two years to make a decision and if the decision is not reached by that time, then the Offer is automatically accepted.^[1]

[edit] Scams

The IRS issued a consumer alert for consumers to beware of promoters' claims to settle debts for "pennies on the dollar" through the OIC program.^[2] The warning addresses companies charging high fees to consumers who may not be eligible for the program; all other payment means would have to be exhausted, including installment payments.