1.5 IRS Procedures: Collection Procedural Questions
What is an Offer in Compromise?
An offer in compromise (OIC) is an agreement between a taxpayer and the
Internal Revenue Service (IRS) that resolves the taxpayer's tax liability.
The IRS has the authority to settle, or compromise, federal tax liabilities
by accepting less than a full payment under certain circumstances. The IRS
may legally compromise for one of the following reasons:
Doubt as to Liability: Doubt exists that the assessed
tax is correct.
Doubt as to Collectibility: Doubt exists that the
taxpayer could ever pay the full amount of tax owed. The minimum offer amount
must generally be equal to (or greater than) the taxpayer's reasonable collection
potential (RCP). The RCP is defined as the total of the taxpayer's realizable
value in real and personal assets, plus his/her future income.
Note: Unless the taxpayer files an OIC claiming special
circumstances, the offered amount must equal or exceed the reasonable collection
potential. Realizable value is the asset's quick sale value (amount which
could be reasonably expected through the sale of the asset) minus what the
taxpayer owes to a secured creditor.
Effective Tax Administration: There is no doubt that
the tax is correct and no doubt that the amount owed could be collected in
full, but exceptional circumstances exist such that collection of the full
amount would create economic hardship or where compelling public policy or
equity considerations provide sufficient basis for compromise. The taxpayer
bears the burden of proof to show their OIC qualifies for public policy or
equity considerations. They must show that their circumstances are compelling
enough to justify acceptance of their OIC compared to other taxpayers in similar
circumstances.
For additional subjects on Offer in Compromise see Offer
in Compromise.
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