The Offer in Compromise Rules: How They Work

by | Jul 20, 2018 | Taxes

You may have seen the television ads that promise to settle tax liabilities for “pennies on the dollar.” The process, which involves the IRS Offer in Compromise program, is not as simple as some on TV would like you to think. In fact, it can be quite complex.

The Basics: An Offer in Compromise is an agreement between a taxpayer and the government that settles a tax liability for payment of less than the full amount owed.

According to the IRS, an offer will be accepted “when it is unlikely that the tax liability can be collected in full and the amount offered reasonably reflects collection potential.”

On what basis can a taxpayer request an Offer in Compromise?

When there is doubt about collectibility. In other words, doubt exists that the taxpayer could ever pay the full amount of tax owed.When there is doubt about liability. This means that doubt exists that the assessed tax is correct.

An Offer in Compromise must generally be accompanied by some money, in addition to the $186 application fee. (See right-hand box for the details.)

Exception: Taxpayers qualifying as low-income or filing a “doubt as to liability offer” are not required to pay the $186 application fee or make the partial payments. A low income taxpayer is an individual whose income falls at, or below, poverty levels based on guidelines established by the U.S. Department of Health and Human Services.

Offers in Compromise are required to be accompanied by a partial payment (unless the taxpayer meets low income certification guidelines). The amount depends on the terms.

In the case of a lump-sum offer, the partial payment required is 20% of the amount of the offer. If the taxpayer doesn’t make the required 20% payment, the offer can be returned to the taxpayer.

A taxpayer filing a periodic payment offer must pay the first proposed installment payment with the application and pay additional installments while the IRS is evaluating the offer. A periodic payment offer means payments made in several installments. 

Contact us if you want more information about Offers in Compromise.  Our tax professionals can help increase the chances an offer will be accepted by the IRS.