What is an Offer in Compromise?
An offer in compromise (OIC) is an agreement between a taxpayer and the Internal Revenue Service that settles the taxpayer’s tax liabilities for less than the full amount owed. Absent special circumstances, an offer will not be accepted if the IRS believes that the liability can be paid in full as a lump sum or through a payment agreement.
In most cases, the IRS will not accept an OIC unless the amount offered by the taxpayer is equal to or greater than the reasonable collection potential (RCP). The RCP is how the IRS measures the taxpayer’s ability to pay and includes the value that can be realized from the taxpayer’s assets, such as real property, automobiles, bank accounts, and other property. The RCP also includes anticipated future income, less certain amounts allowed for basic living expenses. For that reason, it is central to the process that the related financial analysis be very carefully prepared and presented to the taxpayers greatest advantage.
CAUTION: Taxpayers should beware of promoters’ claims that tax debts can be settled through the offer in compromise program for “pennies on the dollar”. Although this scould be the case, it would be based on the reasonable collection potential arrived at through the aforementioned financial analysis, and not “horsetrading.”