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Offers in compromise: Negotiate a tax settlement with the IRS

The IRS has a vast arsenal of tools to use when collecting taxes. It has a tool, however, that it can use to cut its losses, so to speak, in a case when full collection from a taxpayer is doubtful: the offer in compromise, sometimes referred to as an OIC.

If the agency accepts a taxpayer's OIC proposal, it allows the taxpayer to enter into a payment plan that will result in the IRS accepting less than the full amount of tax owed. It can be advantageous for a taxpayer owing substantial past due taxes to explore whether an OIC might be smart when the IRS is unlikely to be able to collect the entire amount.

OIC basics

Last week, the IRS published a Special Edition Tax Tip explaining how OICs work. While the concept seems simple, applying and qualifying for an OIC acceptable to the agency can be complex and require considerable effort and skill. In particular, engaging a tax lawyer to assist with the application process can bring important perspective and understanding of the legal issues involved.

An attorney can also discuss with the taxpayer whether other options might be more desirable.

Legal prerequisites

Requirements for an OIC include:

  • The taxpayer cannot afford to pay the entire amount due.
  • All tax returns must have been filed.
  • The taxpayer may not be involved in an open bankruptcy case.

One of three conditions must be true for the IRS to accept an OIC:

  • There is dispute as to whether taxes are owed at all or doubt about the correct amount of taxes owed.
  • The taxpayer's assets and future income will not be enough to pay the amount owed after reasonable living expenses are considered.
  • Exceptional circumstances justify an OIC because otherwise the taxpayer would experience financial hardship or because paying the full amount due would be unjust or unfair.

Legal counsel is especially helpful in advocating for a taxpayer in an OIC application when the issue is whether the tax debt is actually collectible - a determination called the "reasonable collection potential" or TCP - or whether exceptional circumstances exist.

A successful OIC must be paid up front in cash within 90 days or in a short- or longer-term payment arrangement. Also, if an OIC is accepted, the taxpayer must stay up to date on all payments and tax filings for five years.

Finally, should the OIC application be denied, a lawyer can help the taxpayer analyze whether an appeal is a smart option, as well as look at whether another approach would make more sense.

Here at Brown, PC, in Fort Worth we assist U.S. individual and business taxpayers in Texas, across the country and even abroad with making offers in compromise to the IRS.

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