The IRS offers three different types of Offers-in-Compromise (OIC). Trying to obtain an offer in compromise is not the best option for all tax situations. In fact, most taxpayers' issues are resolved through other avenues with the IRS. It comes down to the facts of each taxpayer's unique and specific situations. To determine if your eligible for an offer in compromise and which offer is right for you, reach out to a tax attorney.
The three types of Offers in Compromise are (1) Doubt–as-to-Collectability Offer, (2) Doubt-as-to-Liability Offer, and (3) Effective Tax Administration.
Doubt-as-to-Collectability Offer – This type of offer is the one most people think of when they hear offer-in-compromise. With this type of offer, the taxpayer is not disputing that they owe the debt. The taxpayer is telling the IRS that they cannot repay the debt in full. Because the taxpayer cannot repay the debt in full, the IRS will allow the taxpayer to pay a reduced portion of the debt. The offer is based on a calculation that determines the taxpayer's Reasonable Collection Potential (RCP). I will go into more detail about this calculation in another blog entry. There is no negotiating with the RCP formula. The IRS has strict guidelines in setting the RCP; however, a knowledgeable tax attorney can advise the taxpayer to make legitimate adjustments to their monthly expenses to obtain a more favorable offer for the taxpayer. Another reality to consider with Doubt-as-to-Collectability Offer is the chance that it is rejected by the IRS. If the IRS rejects the offer, the taxpayer can submit another offer or try to appeal the decision. The offer in compromise process can be costly and extensive. The taxpayer should engage the right attorney to reduce the possibility of not having an offer be successfully submitted and accepted by the IRS before or at appeals.
Doubt-as-to-Liability Offer – With this offer, the taxpayer is agreeing to settle the debt; however, the taxpayer does not owe the tax debt and can prove they do not owe the debt. I know a lot of people will read this and say why make any offer to the IRS at all if you can prove you do not owe the debt. Or why not make the offer amount zero (0)? While I agree with the questions, the program is set up to where you have to provide a settlement amount that is higher than zero. Depending on the size of the debt, an attorney might recommend sending in one hundred dollars to a few thousand dollars. If you send in an offer for zero, the IRS will reject the application and send it back to you. Along with the application, you will want to provide all supporting documentation showing that you do not owe the debt in question.
Effective Tax Administration – The Effective Tax Administration offer is the lease used offer type. With this type of offer, the taxpayer is indicating that yes I owe the tax, and yes I have enough assets to pay the tax; however, for public policy reasons you should not make me pay the tax or accept less than the full amount due. There are generally three factors considered by the IRS in an Effective Tax Administration situation. I will go into fuller details for each of these in a separate blog; however, the three factors are (1) Economic Hardship, (2) Public Policy or Equity Grounds, and (3) the compromise would not undermine compliance with the tax law. Let's consider in one example a 75-year-old lady. She has assets and cash of $100,000 and she owes the IRS back taxes of $100,000. The IRS can rightfully require the elderly taxpayer to repay the tax debt; however, for this example, let us assume this is all of her savings. Also, let's assume she is unable to work any further. An attorney would raise an argument under Effective Tax Administration. If the IRS were to pursue this debt, it would essentially make the lady destitute. By removing all of her assets, she will now need to rely upon public assistance to support herself and any medical bills. A strong public policy argument can be made that we do not want to make the elderly destitute and not able to take care of themselves. In this instance, the IRS might be willing to not pursue the debt if the argument can be sufficiently evidenced.
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At Napoleon Law Firm, our attorney routinely represents taxpayers in IRS civil tax cases located in Memphis and Jackson Tennessee; Southhaven, Horn Lake, Olive Branch, and Oxford Mississippi; and, West Memphis Arkansas. Because I am a licensed attorney, I can represent IRS cases across the country. To see which offer-in-compromise is right for you; have any questions about IRS tax resolution; or any other IRS issue you might have, please feel free to contact me at (901-335-4541) or [email protected].