Offer in Compromise: How to Settle Your IRS Tax Debt for Less

Before the IRS will process an offer in compromise, the taxpayer must have filed all required federal tax returns, made all required estimated tax payments for the current year, and not be in an open bankruptcy proceeding, and the taxpayer who has not satisfied these pre-filing requirements will receive the offer back unprocessed with the application fee refunded.

Business tax and tax audits and adjustments counsel can evaluate whether the taxpayer meets the threshold eligibility requirements for an offer in compromise under IRC Section 7122, assess whether the taxpayer has filed all required returns and made all required estimated tax payments, and advise on the most effective pre-application compliance strategy.

The three grounds for submitting an offer in compromise are doubt as to liability, which applies when the assessed tax is genuinely disputed, doubt as to collectibility, which applies when the taxpayer cannot pay the full liability within the remaining collection statute, and effective tax administration, which applies when collection would create economic hardship or be inequitable even if the taxpayer could technically pay.

IRS audit defense and IRS tax debt counsel can advise on the specific grounds for submitting an offer in compromise and which basis best fits the taxpayer's circumstances, assess whether doubt as to liability, doubt as to collectibility, or effective tax administration provides the strongest basis for the offer, and develop the offer submission strategy.

The RCP equals the net realizable equity in the taxpayer's assets plus the present value of future disposable income over twelve months for a lump sum offer or twenty-four months for a periodic payment offer, and the IRS uses standardized allowable living expense amounts to determine monthly disposable income after subtracting allowable expenses from gross monthly income.

FBAR and FATCA compliance and international tax compliance counsel can advise on the specific RCP calculation methodology applicable to the taxpayer's assets and income, assess whether all assets have been correctly valued and all income correctly projected in the RCP worksheet, and develop the RCP calculation strategy that accurately presents the taxpayer's ability to pay.

The IRS values assets at quick sale value, typically eighty percent of fair market value, and the taxpayer who owns real property, retirement accounts, vehicles, or business assets must provide current valuations for all assets and may dispute the IRS's valuation during the offer negotiation and appeal process.

Cryptocurrency tax and cryptocurrency taxation counsel can advise on the specific asset valuation and income calculation issues that arise when the taxpayer holds cryptocurrency, digital assets, or other non-traditional assets, assess whether those assets have been correctly valued at net realizable value for RCP purposes, and develop the asset disclosure and valuation strategy for the OIC application.

When the IRS receives an offer in compromise, it generally suspends levy action during the period the offer is under consideration and for thirty days after a rejection, and the taxpayer who submits an offer while a levy is pending can use the offer as an effective tool to stop the levy while the application is reviewed.

IRS tax levy and bankruptcy for tax relief counsel can advise on the specific IRS collection actions that are suspended during the pendency of an offer in compromise, assess whether filing an OIC is the most effective strategy for stopping a pending levy or lien, and develop the integrated collection defense and offer submission strategy.

The table below identifies the four OIC payment structures under Treasury Regulations Section 301.7122-1, how each works, the applicable minimum offer amount calculation, and the application fee requirement.

Tax fraud and corporate tax refund counsel can advise on the specific payment structure that best suits the taxpayer's circumstances as identified in the matrix, assess whether the lump sum or periodic payment structure minimizes the total amount the taxpayer must offer, and develop the OIC payment strategy.

The IRS rejection of an offer in compromise can be appealed to the IRS Independent Office of Appeals within thirty days of the rejection letter, and the taxpayer who provides new information, corrects errors in the IRS's RCP calculation, or presents additional evidence of economic hardship is in the strongest position to succeed on appeal.

Estate tax and inheritance tax counsel can advise on the specific grounds available to challenge an IRS rejection of an offer in compromise, assess whether the IRS correctly applied the RCP formula and correctly evaluated the ETA factors, and develop the OIC appeal strategy for reversing the IRS rejection.

The taxpayer whose offer in compromise is accepted must remain in full tax compliance for five years following the acceptance date, filing all required returns on time and paying all taxes owed for the five-year period, and the IRS will reinstate the original tax liability in full if the taxpayer defaults on these post-acceptance compliance obligations.

Gift tax exclusion and family gift tax counsel can advise on the specific post-acceptance compliance obligations that the taxpayer must satisfy to keep the accepted OIC in effect, assess whether the taxpayer is at risk of defaulting on the OIC and having the original tax liability reinstated, and develop the post-acceptance compliance strategy.