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Discussion
An offer in compromise (OIC) is an agreement between a taxpayer and the IRS to settle their tax liabilities for less than the full amount owed. This option is not available to taxpayers with the ability to pay in full through an installment agreement or other means. A taxpayer must meet the following requirements before an OIC is submitted to the IRS:
- All tax returns must be filed; and
- Current tax liabilities must be settled.
In most cases, the IRS won't accept an OIC unless than the amount offered by a taxpayer is equal to or greater than the reasonable collection potential (RCP). The RCP represents the taxpayer's ability to pay and is calculated using form 656. The calculation takes into account income generated by the taxpayer, value that could be realized by selling off the taxpayer's assets (cars, houses, investments, etc.) offset by an allowance for basic living expenses. The IRS may accept an OIC for the following reasons:
- Doubt as to liability - There is a genuine dispute to the existence or amount the correct tax debt under the law;
- Doubt as to collectibility - The taxpayer's assets and income are less than the full amount of the tax liability; and
- Effective tax administration - The IRS requiring payment in full would create an economic hardship or would be unfair and inequitable because of exceptional circumstances.
To apply for an OIC, a taxpayer must file the following documents:
- Form 656 - Offer in Compromise;
- Form 433-A (if applicable) - Collection Information Statement for Wage Earners and Self-Employed Individuals;
- Form 433-B (if applicable) - Collection Information Statement for Businesses;
- $186 application fee (unless the taxpayer meets the low income certification); and
- Initial offer payment (unless the taxpayer meets the low income certification) - equal to 20% of the lump sum payment or the first month's payment for a periodic offer.
If an offer is rejected, the taxpayer has the right to appeal the decision. If an offer is missing one of the elements listed above, the IRS will return the offer. The taxpayer may then refile the offer with the correct documents.
Low-Income Certification
A taxpayer qualifies for the low income certification if their 2017 gross monthly household income is below the listed amounts.
References
https://www.irs.gov/taxtopics/tc204
https://www.irs.gov/pub/irs-pdf/p594.pdf
https://www.irs.gov/pub/irs-pdf/f656b.pdf
Disclaimer
Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.