Taxpayers who owe taxes to the Internal Revenue Service have a couple of recourses to handle their debt. While many benefit from installment agreements, taxpayers whose tax debts far exceed their incomes and ability to pay may not find these types of solutions feasible. Taxpayers who are unable to repay what they owe to the IRS might benefit from a different program called an Offer in Compromise.
What is an offer in compromise?
The IRS offer in compromise is a program through which the IRS allows taxpayers to settle their tax liabilities for less than what they owe. The authority to accept less than what is owed is granted by 26 U.S. Code § 7122. Under this statute, taxpayers may submit lump-sum offers in compromise to settle their tax debts through a lump-sum payment or periodic payment offers in compromise to settle their liabilities through a finite number of periodic payments. If a taxpayer submits an offer in compromise to the IRS for a lump-sum, he or she will be required to submit an initial payment with the offer. People who submit periodic payment offers in compromise must submit the amount of the initial periodic payment with their offers.
Under IRM 5.8.1, the IRS will accept an offer in compromise when it deems the tax liability to be otherwise uncollectible. It may also agree to an offer in compromise when there is doubt about the liability owed and to support the effective administration of taxes. The goal of the OIC program is to negotiate a legal payment agreement that is in the taxpayer’s and IRS’s best interest.
Doubt about Collectibility
The first ground for approving an offer of compromise exists when the IRS doubts its ability to collect the tax debt because of the taxpayer’s financial inability to pay the full amount owed. Doubt about the collectibility of tax debt may be shown when a taxpayer’s income and assets are insufficient to satisfy the full tax liability. this is the most common ground for making an offer in compromise. Some taxpayers who submit offers in compromise for tax debts that are deemed to not be collectible can settle their liabilities for a fraction of the total owed. Under IRC § 7122(d)(3)(A), the IRS must not deny an offer in compromise when their denial is solely based on the amount that is offered.