With an Offer in Compromise (OIC) you pay the IRS what you can afford based upon your assets and a cash flow multiple and the tax liability goes away. It’s not quite that simple but that’s the premise.
There are three types of OICs:
Exceptional Circumstances
This is also known as Effective Tax Administration. This is when you have sufficient assets to pay the full amount, but due to exceptional circumstances, requiring full payment would cause an economic hardship or would be unfair and inequitable. This is the most difficult type of OIC to have accepted.
Doubt as to Liability
This is when you don’t feel as though you owe the tax. It’s usually used for the trust fund penalty.
Doubt as to Collectibility
This is when you have insufficient assets and income to pay the full amount. This is the most often filed and the one that we’ll expand on.
A Form 433-A as described in Chapter Eight needs to be completed first in order to determine the value of the assets to be included and the net cash flow available. There are limits on some of the expenses, meaning you don’t get to use the actual expenses you pay but a standard as determined by the IRS. These are living expenses, housing and utilities, vehicle ownership costs and vehicle operating expenses. You take the cash flow and multiply it either by twelve or twenty four, depending upon how quickly you can pay the total offer amount. You don’t get to decide how much to offer, it is a very finite formula that needs to be followed.
When it’s accepted and you pay the offer amount the balance of your tax liability goes away. You do need to file your returns and pay any balances due on time for five years after the OIC is accepted. If you don’t comply with this then they will take all of the unpaid taxes that were written off and start the collection process over again. Over the years I’ve had a few clients not comply with these rules and their nightmare began again. My experience is that a taxpayer that defaults on an OIC doesn’t get much sympathy from a Revenue Officer. Most of them have either done another OIC or filed bankruptcy, a step they otherwise wouldn’t have needed to take.
