An IRS Tax Compromise Means An Offer In Compromise

Posted on 01. Oct, 2011 by in Back Tax Returns, Back Taxes, Help Filing Back Taxes

A taxpayer with outstanding tax liabilities need not worry that there is no such thing as an IRS tax compromise.

There is a way to work out an IRS tax compromise – it’s something called an Offer in Compromise or OIC.

What exactly is this somewhat strange-sounding thing?

As described by the Internal Revenue Service, an OIC is an agreement between a taxpayer and IRS that settles the taxpayer’s tax liabilities for less than the full amount owed.

There is an important proviso to this. If the tax debt can be fully paid through an Installment Agreement or by other means, the taxpayer usually will be ineligible for an OIC.

For an IRS tax compromise in the form of an OIC, the agency will apply a standard known as the reasonable collection potential (RCP).

Simply put, the RCP is a measurement of the taxpayer’s ability to pay. The RCP includes the value that can be realized from the taxpayer’s assets. Besides property, it also includes anticipated future income, which is reduced by certain permissible basic living expenses.

This IRS tax compromise may be accepted by the agency on the basis of three grounds.

First, acceptance is allowed “if there is doubt as to liability.”

Second, acceptance is permissible “if there is doubt that the amount owed is collectible.”

Third, acceptable is permitted “based on effective tax administration.”

To apply for an IRS tax compromise, a taxpayer must use one or more forms depending on the grounds they are claiming.
Except if the OIC is submitted based on doubt as to liability, a taxpayer must file either two or three forms – Form 656, Offer in Compromise; Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals; and/or Form 433-B, Collection Information Statement for Businesses.

A taxpayer filing an OIC based on doubt as to liability must use Form 656-L, Offer in Compromise (Doubt as to Liability).

Generally, to apply for this IRS tax compromise, there is a $150 application fee.

Taxpayers may choose to pay the OIC in a lump sum, which can constitute a maximum of five (5) payments. A periodic payment offer involves a minimum of six (6) installments.

Upon acceptance by the agency, “IRS expects that the taxpayer will have no further tax delinquencies and will fully comply with the tax laws.” Failure to abide by this dictate can result in IRS making a determination that the OIC is in default.

Of course, this IRS tax compromise involves additional details that should be clearly understood.

Perhaps you can add a smile to your face if you keep in mind that an OIC equates to an IRS tax compromise.

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