Tax Offer in Compromise

An offer in compromise (OIC) is an agreement between a taxpayer and the Internal Revenue Service that settles the taxpayer’s tax liabilities for less than the full amount owed. Absent special circumstances, an offer will not be accepted if the IRS believes that the liability can be paid in full as a lump sum or through a payment agreement.

Probably the most important component of submitting a tax offer in compromise is section 9 of Form 433-A, otherwise referred to as the Monthly Income and Expense Analysis. It provides the basis by which the filer’s monthly income is weighed against their expenses, resulting in what the IRS calls the filer’s reasonable collection potential (RCP).

Unfortunately, the previous values for living expenses, housing, and transportation serve a set of de facto standards that provide the IRS with distinct fundamental amounts not to be exceeded by claimed costs in the amount credited to any individual. This opposes stipulations in the Internal Revenue Code that dictate a certain amount of flexibility regarding the specific case of each citizen. But in reality, the IRS only deviates from these norms extremely rarely.

Other Tax Debt Strategies

There are five, and only five, ways to get out of tax debt. Filing an offer in compromise is one of them. The other four options are:
Installment agreement: a monthly payment plan for paying off the IRS.
Not currently collectible: a program where the IRS voluntarily agrees not to collect on the tax debt for a year or so.
Partial payment installment agreement: a fairly new debt management program where you have a long term payment plan to pay off the IRS at a reduced dollar amount.
Filing bankruptcy: discharge your tax debts under the strict rules of a Chapter 7 or 13 bankruptcy petition.

Consumer Alert

In 2004, the IRS issued a consumer alert warning of promoters’ claims to settle debts for “pennies on the dollar” through the OIC program. The warning addressed companies charging high fees to consumers who may not be eligible for the program; all other payment means would have to be exhausted, including installment payments. A recommendation is to check with the Better Business Bureau before contracting any firm to resolve tax problems.

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