Offers in Compromise

On May 21, 2012, the Internal Revenue Service (IRS) announced more flexible terms to its Offer in Compromise (OIC) program.1   An OIC is an agreement between a taxpayer and the IRS that settles the taxpayer’s tax liabilities for less than the full amount owed.  The IRS will generally not accept an OIC if the IRS believes the tax liability can be paid in full as a lump sum or a through an installment agreement.

In evaluating an OIC, the IRS conducts a financial analysis by reviewing a taxpayer’s assets, income and allowable expenses as supplied to the IRS on Form 433-A(OIC).  It then makes a determination of the taxpayer’s “reasonable collection potential” which forms the basis of an OIC.

The most recent IRS announcement on its OIC program gives greater flexibility for taxpayers on the financial analysis by:

  • Revising the calculation for a taxpayer’s future income by reducing it to 12 months of future income for an OIC paid in 5 or fewer months (down from 48 months) and to 24 months of future income for an OIC paid in 6 to 24 months (down from 60 months);
  • Allowing taxpayers to repay their student loans;
  • Allowing taxpayers to pay state and local delinquent taxes; and
  • Expanding the Allowable Living Expense allowance categories and amounts (i.e., allowing greater exemptions for cash, motor vehicles, airplanes and boats and transportation expenses and narrowing the definitions of dissipated assets and retired debt that can increase a taxpayer’s reasonable collection potential).

Applying for an OIC is a complex process and requires a complete understanding of IRS rules to achieve the best result.  Settling your tax debts for “pennies on the dollar” as advertised on late-night infomercials is the exception rather than the norm.

Depending on how old your tax debts are, it may not be in your best interests to submit an OIC and doing so, when it is not appropriate, could make your tax problem worse.

1 IR-2012-53