Negotiating an Offer in Compromise Requires Strategy and Skill
An Offer in Compromise (OIC) is an agreement between the taxpayer and the government that settles a tax liability for less than the full amount owed. Attempting to negotiate an OIC yourself is not advisable. The difference between approval and rejection of an OIC is often the knowledge, experience and judgment of the person negotiating the agreement. You should always rely upon the services of an experienced tax professional.
Daniel Rosefelt & Associates have had many years of experience helping taxpayers reduce their federal and state tax liabilities through the OIC program and similar state initiatives. The process of submitting an OIC and obtaining IRS acceptance is complicated — success requires substantial attention to details and compliance with a variety of IRS regulations, procedures and guidelines.
To speak with us about your tax situation, call (301) 656-4424 or reach out by completing our ten-second consultation form. We serve clients throughout the U.S. and around the world from our offices in Bethesda, Maryland, and Washington, D.C.
Types of Offers in Compromise
There are three different kinds of OICs:
- Doubt as to Collectibility — Allows you to settle your tax debt for less than the full amount you owe. It may be a legitimate option if you can’t pay your full tax liability, or doing so creates a financial hardship
- Doubt as to Liability — Applicable when doubt exists that the IRS assessed the correct amount of tax liability. This method only applies if you can prove you do not owe the tax assessed, not because you are unable to pay the tax liability
- Effective Tax Administration (ETA) — An ETA offer is made when a taxpayer agrees with the delinquent tax amount that the IRS is seeking to collect and would be able to pay the full amount owed, but an exceptional circumstance exists that may cause the IRS to consider the taxpayer’s offer. To be eligible for compromise on this basis, you must demonstrate that the collection of the tax would create an economic hardship or would be unfair and inequitable
The Doubt as to Collectability Guidelines
The most common Offer in Compromise is a Doubt as to Collectability, allowing you to settle your tax debt for less than the full amount you owe. The IRS will consider your unique set of facts and circumstances, including:
- Ability to pay
- Asset equity
The IRS will generally approve an Doubt as to Collectability OIC when the amount offered represents the most it can expect to collect within a reasonable period of time. As such, the IRS calculates your Reasonable Collection Potential (RCP) in determining the amount it will accept. Before the IRS can consider a Doubt as to Collectability offer, the taxpayer must not be able to pay the taxes in full either by liquidating assets or through current installment agreement guidelines. You must submit the appropriate collection information statement along with all required supporting documents to prove that this is the case.
The IRS’ goal in approving an OIC is to achieve collection of the amount that it believes to be potentially collectible from a taxpayer at the earliest possible time and with the least cost to the government. In addition to its collection goal, the IRS expects that its acceptance of an adequate offer will result in a fresh start toward compliance with all future filing and payment requirements. Once an offer is accepted, the taxpayer must remain in compliance with all filing and payment requirements for the next five years.
Doubt as to Collectability OIC Payment Options:
Lump Sum Cash Offer
The taxpayer must pay the offer amount in five or fewer monthly installments and must include the net realizable value of your assets (often discounted for quick sale valuation), plus the amount equaling 12 months of your net disposable income as determined by IRS guidelines.
Short Term Periodic Payment Offer
The taxpayer must pay the offer amount in 24 monthly installments and must include the net realizable value of your assets (often discounted for quick sale valuation), plus the amount equaling 24 months of your net disposable income as determined by IRS guidelines.
Information Required To Obtain An Offer in Compromise
In order to submit and ultimately receive IRS approval of an OIC, a taxpayer is required to provide the IRS with a wide range of financial documentation used to evaluate the taxpayer’s ability to pay. The IRS will consider the amount that could be obtained from the equity in your house and other assets, plus any additional amount that you should “reasonably” be able to pay from your monthly budget. Your OIC package will include a recent financial statement prepared on an IRS Form 433-A (OIC) (Individual or Self-Employed Taxpayers) and/or Form 433-B (OIC) (Business Taxpayers), and is often supported by recent bank statements, tax returns, paystubs, house and property appraisals, deeds, car titles, monthly expense invoices and receipts and a variety of other financial documents. These documents are used by the IRS to confirm your eligibility for an OIC and determine the settlement amount it will accept.
The IRS reviews your financial information in the light of its own income and expense standards. It does not compute your “reasonable collection potential” by subtracting your actual monthly expenses from your monthly income. Rather, the IRS determines your allowable monthly expenses by using a complex set of artificial national and local expense standards based on family size and yearly income.
How We Can Help
For taxpayers who qualify, an Offer in Compromise is an excellent way to resolve a tax problem and get a fresh start with the IRS. However, the decision to make an Offer in Compromise is complicated — success depends on the proper application of knowledge, experience and attention to detail. The experienced tax professionals at Daniel Rosefelt & Associates, LLC, Attorney & CPA have negotiated substantial numbers of OICs and will work diligently to obtain the best possible result for you.