Two Types of Offers in Compromise

Posted by Jeffrey Siegel on October 23, 2019

Doubt As To Collectability

The Offer in Compromise (OIC) for doubt as to collectability is a settlement initiated by a taxpayer based on a snapshot of the taxpayer’s financial situation.  In many cases, taxpayers can settle large tax debts for significantly less than they owe.

The IRS will consider a client’s Reasonable Collection Potential (RCP), including equity in assets after factoring in exemptions and income less allowable living expenses each month.  The IRS would expect the client to pay over the remaining monthly income multiplied by either 12 or 24, depending on how quickly the taxpayer will pay the offer amount.

Going back to our client’s facts, the IRS would first consider the equity in her assets, which might include her home, vehicle, and IRA.  Generally, the equity amount equals 80% of the fair market value of any assets less encumbrances.  If her home were valued at $250,000, 80% of this would be $200,000.  A mortgage balance of $210,000 would result in no equity in the home for purposes of calculating the RCP.  The IRS provides exemptions for vehicles and bank accounts, which may result in finding no equity for these assets.  Clients are often surprised to learn that 80% of the retirement account value will be included in the RCP.  If our client’s IRA had a fair market value of $5,000, the IRS would consider $4,000 as equity for the RCP.

The IRS would also consider remaining monthly income in calculating the future income amount.  The future income amount adds to the equity in assets to determine RCP.  Assuming our client had $200 remaining per month, the minimum future income amount the IRS would accept would be $2,400 ($200 x 12).  While many taxpayers want to pay the offer amount as quickly as possible to put their debts behind them, our client could elect a longer payment term–up to 24 months.22

The advantage of this alternative is that the remainder of the tax debt is forgiven, and once the negotiated terms are satisfied, any liens that may have been filed on a taxpayer’s property are released within 30 days. The disadvantages include adhering to certain compliance requirements for five years after acceptance, such as filing all required returns and paying all taxes due by the filing deadline each year, and forfeiture of any refunds for a period of time.

Effective Tax Administration Offers in Compromise

Let’s assume the client owns her house outright without a mortgage, and she is elderly and receiving only Social Security income. She could sell her home to pay the tax debt in full but doing so would likely render her homeless because it would be too expensive for her to afford a comparable living situation. In this case, the IRS would generally be willing to consider an Effective Tax Administration (ETA) OIC on grounds that it would create a significant economic hardship for our client to have to pay the tax liability.

The IRS will also consider ETA OICs on the basis of public policy or equity considerations identified by the taxpayer.  Such considerations provide a sufficient basis “only where, due to exceptional circumstances, collection in full would undermine public confidence that the tax laws are being administered in a fair and equitable manner.” For example, the IRS may consider an ETA offer where a taxpayer owes tax because of circumstances outside the taxpayer’s control, such as where a criminal or fraudulent act of a third party is directly responsible for the tax liability.25

Need back tax help in Kansas City?  Bank account levied in Kansas City?  Paycheck garnished in Kansas City?  Lien on business or home in Kansas City? If you or a client need help fighting off the IRS, call Jeffrey R. Siegel, your Kansas City tax attorney.  We help with IRS liens, wage garnishments, levies, offers in compromise, innocent spouse relief, federal employment tax, Trust Fund Recovery Penalty and installment agreements.  Bring back some stability to your life, and call (913) 735-4829.