What is an IRS Offer in Compromise?

An IRS offer in compromise (OIC) is an agreement between the taxpayer and the IRS that settles a tax debt for less than the full amount owed. The offer program provides eligible taxpayers with a path toward paying off their tax debt and getting a “fresh start.” The ultimate goal is a compromise that suits the best interest of both the taxpayer and the IRS. Correct timing of your OIC filing will give you an opportunity to come up with a strategy in dealing with your financial situation.

To be considered, generally you must make an appropriate offer based on what the IRS considers your true ability to pay. An offer in compromise allows a taxpayer to get relief on their past back tax liabilities, but for less than the full amount owed. It is an excellent option for taxpayers suffering from financial hardship, but not a solution for every case.

Required Steps Prior to Filing Your Offer with the IRS

Before filing an OIC, a taxpayer must:

• file all tax returns s/he is legally required to file;
• make all required estimated tax payments for the current year, and
• make all required federal tax deposits for the current quarter if a business owner with employees.

NOTE: A business which is currently in an open bankruptcy proceeding is not eligible to apply for an offer. But, you can file bankruptcy petition while your OIC is pending.

After Filing Your Offer

• If your business owes trust fund taxes, responsible individuals may be held liable for the trust fund portion of the tax.
  Trust fund taxes are the money withheld from an employee’s wages, such as income tax, Social Security, and Medicare taxes.
• If the taxpayer has an approved installment agreement with the IRS and is making installment payments, s/he may stop making the payments upon submitting the OIC.
  If the offer is accepted, the prior installment agreement with IRS will be reinstated with no additional fee.

When IRS Accepts Your Offer

If OIC is accepted, the IRS will keep any refund, including interest, for tax periods extending through the calendar year that the IRS accepts the taxpayer’s offer. For example, if your offer is accepted in 2013 and you file your 2013 Form 1040 on April 15, 2014 showing a refund, IRS will apply your refund to your tax debt. The refund is not considered as a payment toward your offer.

Bankruptcy as the OIC Alternative

The IRS usually does not consider your ability to pay during settlement negotiations with the taxpayer. Even if the taxpayer is successful in negotiating a settlement totaling only a fraction of the originally asserted deficiency, this may be a hollow victory if the taxpayer cannot come up with the funds to pay the settled amount.

An essential component to the value of an offer in compromise is the analysis of a taxpayer’s disposable income. The IRS will consider the collection result of a potential bankruptcy discharge in evaluating the amount of a compromise. When the taxpayer threatens bankruptcy in an offer in compromise, the amount of the offer may be negotiated as a calculated business decision.

Filing a bankruptcy petition could be a great opportunity to reduce your tax debt. Properly implemented, bankruptcy discharge can eliminate disposable income from an offer in compromise analysis. To find out more, please read Bankruptcy-Related Tax Issues.

We Can Help You

At Guzhva Law Firm, we are providing thoughtful solutions and measurable value to each individual situation. Because U.S. tax law and regulations are complicated and constantly changing, it is important that you obtain up to date information about the provisions that apply to you to prevent costly mistakes.

Our tax attorney can help you to prepare your offer in compromise. There are specific guidelines that have to be met and forms that need to be submitted in order for this process to work. We can work with the IRS to reduce your tax liability and establish a payment plan or other settlement.

To schedule a free phone consultation with an IRS collections attorney, please contact us today. With offices in Bellevue, we work with tax clients throughout Seattle and Washington State, and elsewhere.