Offers in Compromise (OIC)
This is the tax relief often heard of in the news when some celebrity or especially some big corporation settles their tax bill with the IRS for “pennies on the dollar.” The fact is that there are three main reasons the IRS will consider an offer in compromise and the offer is typically in the 40%-60% of tax owed at a minimum.
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The first reason the IRS considers an OIC is termed “Doubt as to Liability.” This means the IRS believes they have a good legal case to support their determination of tax due, but there is a genuine dispute with the taxpayer as to the existence and exact amount of the tax liability.
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Additionally, the legal Counsel for the IRS will look at the strength of the IRS case and the potential costs of litigation. If the potential cost to try the case, especially with some doubt as to liability, exceeds IRS guidelines, the IRS will proceed to negotiate the OIC with the taxpayer.
The second reason the IRS will consider an Offer in Compromise is termed “Doubt as to Collectability.” Doubt as to collectability exists in any case where the taxpayer’s assets and income are less than the full amount of the assessed liability. The IRS also looks at whether they could reasonably obtain more than the OIC by seizing and selling the taxpayer’s assets and could do so without creating an “economic hardship” for the taxpayer.
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The third reason for the IRS accepting an OIC is termed “Effective Tax Administration.” This is where there is no doubt as to the liability, but collection of the debt in full may create and economic hardship for the taxpayer. A second exception under Effective Tax Administration may be justified where, due to exceptional circumstances, collection of the full liability would undermine public confidence that tax laws are being administered by the IRS in a fair and equitable manner.
A taxpayer trying to obtain an OIC on this basis will have to demonstrate that his circumstances justify compromise even though a similarly situated taxpayer may have paid his liability in full.