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What is a Typical Offer in Compromise - Tax Debt Relief

Updated: Aug 23


Coast to Coast - IRS Help

IRS Tax relief - Tax Debt Help

“Settle Your Back Taxes for a Fraction of What You Owe - Tax Evaluation Waiting! Stop IRS Collections Now.”

--Google search ad results, September 2018

If you have cable television have seen ads to settle IRS tax debt. If you searched Google, Bing, etc. for anything related to the IRS, at the top of the bottom of the search results you will see ads for IRS tax relief. The following article, brought to you by the tax professionals at Flat Fee Tax Relief, will provide you with the information needed to move forward.

What’s true is that the IRS has a Fresh Start Program called an Offer in Compromise (OIC). A well crafted Offer in Compromise (#OfferinCompromise) allows taxpayers to settle a tax debt for less than the amount they owe.

The IRS always wants to achieve two (2) goals. One (first) goal is to collect money. The IRS will never accept zero dollars but they will accept as little as $100.

The second (2nd) goal is to close a file. An Offer in Compromise accomplishes both of these goals.


Despite the television and Google, Bing ads that imply the OIC is a common and reasonable solution for many people, the reality is that not everyone is eligible or qualified for to settle with the IRS.

The IRS has been receiving approximately 80,000 Offer in Compromise submissions every year. Out of that pool of taxpayers, the IRS has been settling approximately 42% submissions. The number one reason for rejection is the taxpayer submitted their own Offer in Compromise. The IRS will look at all settlements with a "fine tooth comb." It's better to have an experienced tax professional with a track record of success handle your Offer in Compromise.

1. Most people file for a certain kind of IRS OIC.

There are actually three types of OIC's. The most common one is called “Offer in Compromise, Doubt as to Collectability,” (OIC-DATC). Simply put, an IRS OIC is appropriate for people who can’t pay their taxes and want to settle for a payment that is less than the amount they owe.

For OIC-DATC, taxpayers will need to:

— File a Form 656, Offer in Compromise.

— Attach financial statements (Form 433A-OIC for individuals and Form 433B-OIC for businesses).

— Submit supporting documentation to prove their asset values, liabilities, and monthly income and living expenses.

The two other types of OIC's are:

— “Doubt as to Liability,” when taxpayers don’t think they owe the tax in question. Forget this one as it is very rarely accepted.

— “Effective Tax Administration,” which is reserved for taxpayers who can pay the tax they owe, but it would cause undue hardship, or there are other extenuating circumstances. This often is used by an elderly taxpayer who may have a home with equity.

Taxpayers file few of the last two types of settlement offers. Most people simply owe and can’t pay — so they need a Doubt as to Collectibility OIC.

2. All Tax Returns need to be filed. You must be compliant.

The IRS will accept an settlement offer only if taxpayers are in filing compliance, meaning they’ve filed all required past returns. How far back? In most cases, the IRS requires the past six years.

If taxpayers have lots of past debts and unfiled tax returns, it’s a good idea to file any past returns and wrap all past tax debts into an OIC. A word of caution: If the OIC applicant voluntarily files more than the past six years of tax returns, and the OIC application isn’t successful, the taxpayer will still owe any new balances, plus penalties, to the IRS.

After a consultation with the tax professionals at Flat Fee Tax Relief, we will have a very good idea if you should file an Offer in Compromise. The IRS forbids guaranteeing an Offer in Compromise result. Having written that, when you do as many successful Offers in Compromise as we do, our team has a very good idea on "what will fly and what won't."


3. Withholding and/or estimated tax payments need to be current.

See a pattern here? This is called payment compliance. As you are well aware, the IRS has a myriad of rules and regulations.

When taxpayers file an Offer in Compromise, they must prove to the IRS that they have enough withholding or estimated tax payments so that they won’t owe when they file the next year’s return. Without payment compliance, the IRS will reject the OIC. It is our job to nullify all reasons for the IRS to reject the settlement offer.

IRS Fresh Start
IRS Fresh Start

4. It could be better to contest the taxes and penalties owed.

Before considering an application to settle taxes, taxpayers should analyze their past returns and balances owed to potentially reduce the amount they owe. It may be possible to greatly reduce and even eliminate a tax debt by filing a missing tax returns. This is especially true if the IRS created Substitute for Returns. This is where an experienced tax professional can help. Taxpayers could also request penalty abatement if there was a "reasonable cause" for the tax problem.

In the end, a good look at past tax returns may reveal that taxpayers owe a lot less than they thought they did — and they don’t even need an OIC. All tax options need to be reviewed.

Internal Revenue Service
Internal Revenue Service

5. An Offer in Compromise is a financial formula. It is not a negotiation. It is not a haggle. The IRS settlement formula is is straightforward but not simple: Can taxpayers pay the taxes they owe with their net equity in assets, plus any future disposable income (that could be paid monthly) before the collection statute of limitations expires? The IRS calls this “reasonable collection potential.”

The formula is straightforward and complicated. What’s difficult is determining asset values, assets to be included in an OIC, average monthly income, and regular necessary and allowable monthly living expenses. The IRS limits allowable living expenses, meaning the IRS will scrutinize and potentially limit a taxpayer’s actual expenses in an OIC application.

Pay the IRS
Pay the IRS

6. Taxpayers have to be able to actually pay the offer amount. If taxpayers qualify for a DATC-OIC, the IRS will settle the amount owed based on the OIC payment method:

— The lump sum payment method requires taxpayers to offer the IRS their net equity in assets, plus 12 months of their future monthly disposable income.

— The periodic payment option requires taxpayers to offer the same net equity in assets, but include 24 months of their future monthly disposable income. Our IRS Tax Attorneys have settled many taxpayers for as little as $100. Many have settled for $500. Even the $500 settlement offers can be paid in installments.

OIC Referral Check Sheet
OIC Referral Check Sheet

7. Consider extenuating circumstances.

If taxpayers don’t qualify for the DATC-OIC, they’ll need to consider whether they have extenuating circumstances and may qualify for an Effective Tax Administration (ETA-OIC).

For example, a person has equity in his home that would allow him to pay the tax in full. But he has an illness, and he’ll need to use all his home equity to pay for care. In this case, the IRS may consider his circumstances in an ETA offer. As written above usually Effective Tax Administration may effectively be used by an elderly person who is on Social Security but has a home with equity.

ETA-OICs are rare and require careful consideration about whether the taxpayer’s circumstances qualify, calling for the services of an experienced tax professional. Don't attempt to do this on your own.

1040, W-2, 1099
1040, W-2, 1099

8. Taxpayers file their tax returns on time for five straight years. Taxpayers can’t file and owe for the next five years. For some taxpayers, this is a big obstacle to getting the benefit of an OIC.

If the taxpayer ends up with a tax debt in the next five years, the OIC will be canceled. The IRS will reinstate the original tax debt with added penalties and interest added. You will be right back where you were except the tax debt will be larger. Taxpayers who can’t withhold enough or make required estimated tax payments will have their settlements canceled when they can’t meet future tax obligations. This also happens with business owners who can’t make their estimated tax payments each quarter.

Offer in Compromise - Tx Settlement
Offer in Compromise - Tax Settlement

9. Taxpayers must prove they qualify for the OIC.

In all DATC-OIC's, taxpayers must prove their ability to pay (the reasonable collection potential). A taxpayer must prove everything: asset values, debts owed on assets, monthly income, and necessary living expenses.

Unpaid bills like credit cards are not allowed. Unnecessary expenses, such as payments for recreational assets and charitable contributions, are not allowed. It’s critical to get these values and amounts correct to determine whether taxpayers qualify, and determine the proper offer amount.

When a taxpayer attempts a "do it yourself" Offer in Compromise, the IRS will often dispute these amounts and can disqualify an OIC or ask for a higher offer amount. If taxpayers can’t pay the higher offer amount to settle, the IRS rejects their OIC.

IRS Examiner
IRS Examiner

10. The IRS will investigate taxpayers’ finances. An Offer in Compromise (OIC) investigation, by regulation, can last up to two years. Most OIC investigations (about 80 percent) conclude within nine to twelve months after taxpayers apply. By law, OIC investigations never last more than two years.

If taxpayers owe less than $50,000, the average time is usually about 6 to 9 months. If they owe more than $50,000, the OIC may take a little longer, depending on the complexity of the applicant’s finances. Every taxpayer is different.

A special examiner at the IRS reviews taxpayers’ filing and payment compliance, and all of the components that go into the qualification and offer amount. The examiners work from home and work at their own indvidual speed. The OIC examiner goes in-depth into the taxpayer’s financial history, even looking into old transactions to see whether the taxpayer has tried to hide assets. If the taxpayer owes more than $100,000, it’s common for the examiner to pull a credit report. If the taxpayer has a business, examiners will commonly ask local IRS collection personnel to review the case.

Offer in Compromise Appeals
Offer in Compromise Appeals

11. Be prepared to appeal disagreements with the IRS. About 14 percent of all settlement offer rejections are appealed to a higher level at the IRS to resolve disputes between the applicant and the OIC examiner who initially investigates the application. Why? Common reasons are:

— Asset values and dissipated assets

— The amount of income to be included in average monthly income

— Which expenses should be allowed as necessary living expenses

— Any expenses above IRS-allowed averages

Applicants should be prepared to document and argue all of their assets, income and expenses. Taxpayers should also be prepared to explain why they dissipated any assets before the OIC application. The IRS looks to see whether the dissipated assets should have been used to pay the tax liability before the OIC was submitted.

IRS Harship
IRS Harship

12. People with short-term economic hardship don’t make good OIC candidates.

People with tax debt who are on short-term unemployment aren’t good candidates for OICs. That’s because the IRS believes that once these people get a new job, their normal average monthly income will increase and they’ll be able to pay their debts.

During the housing crisis, many real estate agents with tax debt submitted OICs, only to have the OICs rejected. The IRS said that these individuals’ circumstances would improve, and that they would be able to pay in the future. In these circumstances, requesting “currently not collectible” status (which delays payment) may be the best option to avoid having to make a monthly installment agreement payment.

Payroll Tax Problems
Payroll Tax Problems

13. Businesses may be worse OIC candidates. On going businesses that have business tax debt, such as back payroll taxes, don’t make good OIC candidates. The reason is simple in the eyes of the IRS: If the business is open, then the owner expects to make a future profit. And when it comes to payroll taxes, they’re ultimately not forgiven. If a business owner wants to submit an Offer in Compromise it probably is a good idea to close the business and close out the tax identification number for that business. When that happens, payroll taxes will be changed to ordinary income tax and thus easier to be settled. Payroll taxes can pass on to the “responsible persons” at the business. These people (often owners, controllers or financial officers) become personally liable for the past payroll taxes.

IRS Tax Relief
IRS Tax Relief

14. OIC's won't be the right tax relief option for every taxpayers. Satellite radio and cable TV commercials from tax relief firms pronounce that it’s possible to settle taxes with their experience and negotiation skills. That is true. The problem is some tax relief companies give false hope to some taxpayers who do not qualify.

For people who aren’t good OIC candidates, IRS payment plans may be a better alternative. And taxpayers who have financial hardship or who can’t pay the offer amount may consider a small payment plan or a temporary hardship status that doesn’t require them to pay (“Currently not Collectible” status).

No matter what — if taxpayers believe they may want to apply for an OIC (or need a better option), it’s best to engage a professional to help. The first step is to understand whether they qualify — and if they do — they’ll need to figure out the amount they’d have to pay to settle the tax bill.

An experienced tax professional can help taxpayers avoid pitfalls, set up the right collection option with the IRS, and ultimately save them a lot of grief and money, by evaluating all the alternatives in relation to their specific circumstances.

The tax professionals at Flat Fee Tax Relief provides IRS tax debt help at a very affordable fee. Our teams are located in Clearwater, Florida, and San Diego, California. This allows us to to serve our clients and increases our ability to reach the IRS due to our expanded office hours (8 A.M. Eastern to 6 P.M. Pacific). Accredited by the Better Business Bureau, we offer a free no obligation consultation.



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