An offer in compromise (OIC) is a legal, binding agreement between a taxpayer and the IRS that settles a taxpayer’s liability for less than the full amount owed, sometimes for a lot less than the full amount owed. This is the only debt settlement program that has been codified into law in the Internal Revenue Code section 7122. That is why I call it a legal, binding agreement. And it takes skilled negotiation with the IRS to get it done properly. If an OIC gets rejected, it’s an “act of congress” to reapply. In essence, you really have one shot to get it right.
There are three types of OICs:
- Doubt as to Collectibility (DATC)
- Doubt as to Liability (DATL)
- Effective Tax Administration (ETA)
Doubt as to Collectibility (DATC)
The majority (90% or more of the time) of the OICs that tax resolution specialists do are DATC (financial hardship) offers – and that is what we’ll focus on here..
FACT: An offer in compromise is a privilege, not a right, and the IRS has the final word on whether or not a taxpayer will qualify. In all cases, there is no guarantee an offer will be accepted. That is an important point to remember.
Acceptance Criteria
The IRS will look at reasonable collection potential (RCP) to determine whether or not to accept an offer in compromise. RCP = Monthly Disposable Income plus Net Equity and Assets
That’s the bottom line: The RCP is what the IRS can reasonably expect to collect from the taxpayer. It takes a skilled tax professional to get OICs across the RCP process – and especially with a result that benefits and is agreeable to the taxpayer.
But the IRS will consider other factors with regard to the taxpayer’s overall situation, such as overall health , marital status, number of dependents and age, education level, occupation, future events, and work experience. An IRS offer examiner, especially during an appeals process, will view each case through the lens of future income potential and future collection potential.
A good tax resolution specialist must know how an IRS Appeals Officer thinks…we do. We know how they think and we speak their language. Think about it this way: you’re an American tourist traveling in China. You’re lost somewhere in a small village. You see a local farmer who only speaks Chinese. Unless you know the tax codes and how an examiner thinks, it is like asking a person who only speaks Chinese for help.
Why/How the IRS Approves an Offer in Compromise
- As the taxpayer, you must offer to pay the most you can afford without suffering economic hardship.
- The IRS. To be acceptable, the IRS’s offer examiner or settlement officer must believe the offer amount is the best offer the government will be able to get.
With a 70% fail rate, you need and want an expert firm like IRS Tax Freedom who knows how to prep and negotiate an OIC for success. You need skilled tax resolution professionals who know what to say, and most importantly, who know what not to say to an examiner in order to get your OIC approved. IRS Tax Freedom knows all the right steps and actions to ensure your best result possible.
8 Steps to an OIC
Step 1: The completion of a Collection Information Statement
Step 2: Complete the Offer in Compromise Form 656
Step 3: Submit the OIC Package to the IRS
Step 4: Receive a “Processability” Letter From the IRS
Step 5: Receive contact from the Offer Examiner assigned to your case
Step 6: Receive a Preliminary Determination From IRS
Step 7: Negotiate with the Offer Examiner
NOTE: Collecting taxes is the IRS’s job! The IRS is not in the business of writing off tax liabilities. Their only focus is to get the most money out of you as possible. You need – you MUST – have professional tax negotiators on your side. Here’s a question to ask yourself: if you were accused of a crime, would you even consider defending yourself in a court of law?
Step 8: Offer Accepted or Not Accepted
If the Offer is accepted, pop a bottle of champagne. If it’s not accepted, there is a 30-day window to appeal the rejection.
Note: The OIC journey is an 8 to 12-month process. During the process, you are under the protection of the Power of Attorney, meaning we’re handling all the processes and negotiations. You never need to or have to talk to the IRS. This means you can focus on your health, your family, and your work, basically get back to living your life.
If you’ve been wondering if an offer in compromise would be your best option for solving your tax debt, contact IRS Tax Freedom as soon as you’re ready. We’re here to take the reins and get you the best result possible for your specific situation. Contact us today.