When a taxpayer is unable to pay the full amount they owe to the Internal Revenue Service (IRS), one option to resolve tax liability is to submit an Offer in Compromise (OIC). An OIC allows a taxpayer to settle their tax liabilities for less than the full amount owed to the IRS.
A tax consultant helps an individual or business file an OIC by assessing their financial situation (looking at income, expenses, equities, and assets) and then establishing which of the three types of OICs will be filed:
- DOUBT AS TO LIABILITY OFFER IN COMPROMISE: There is a dispute that the full amount owed is correct.
- DOUBT TO COLLECTABILITY OFFER IN COMPROMISE: There is doubt that the full amount is collectible, assessed by the individual’s assets and income compared to the full amount of tax liability.
- EFFECTIVE TAX ADMINISTRATION OFFER IN COMPROMISE: The taxpayer is capable of payment of the owed taxes, but doing so would cause economic hardship.
The taxpayer then submits the offer in compromise, adapted to their unique situation, making an offer less than the full amount owed. If the offer in compromise is accepted, taxpayers can choose to pay the offer amount as a lump sum, or in monthly payments.
OFFER IN COMPROMISE GIVE A FRESH START
One of our clients is a single mother who had been plagued by IRS debt for over 15 years. She had once been a business owner, but at the time of filing no longer owned the business and was working a W2 job. When she filed her offer in compromise, she owed nearly one million dollars.
She qualified for a Doubt to Collectability Offer In Compromise based on her income and expenses. She didn’t have any equity in her assets, she had no disposable income, and the IRS accepted the offer, giving this woman a fresh start.
AN OFFER IN COMPROMISE IS NOT FOR EVERYONE
Another recent client owed $200,000 after not filing his tax returns in several years; however he was due to receive a $1 million inheritance in a month.
The first tax consultant he called told him that as long as he filed before the inheritance hit his bank account, he could file an offer in compromise. This ultimately was incorrect, and the firm was feeding him false information.
He called Levy & Associates next, and within a five-minute call, we knew he would not qualify for an offer in compromise. However, with our model based on linking a strategy to each case, we were able to find an alternate solution for his tax debt. In this case, we found the best solution instead of telling the potential client what he wanted to hear.
NO TWO SITUATIONS ARE THE SAME
An offer in compromise is not a turnkey solution – a thorough analysis of one’s income, expenses, assets, and equity is required to determine if they are eligible to pay less than the full amount owed to the IRS, and to determine which of the three types of OICs is suited for their situation. If an offer in compromise is accepted, the terms of payment will vary depending on the situation. In the long-term, an offer in compromise is an effective solution to managing and paying off tax debt.