An Offer in Compromise (OIC) is an avenue for taxpayers who owe substantial amounts of tax debt to the IRS to prove their inability to pay the debt in full, usually due to economic hardship, and settle the debt for a smaller amount. Taxpayers who qualify for tax debt resolution through an OIC may find that large amounts, if not all, of their tax debt can be cleared. However, not everyone qualifies for an OIC. The IRS has stated that they generally approve OICs when the amount offered is representative of the most they can expect to collect in unpaid taxes within a reasonable period of time. Although the IRS does not provide a clear-cut definition of a reasonable time period, your tax attorney or Enrolled Agent may be able to provide you with more information. It is important to note that the IRS has no longer than 10 years to collect your unpaid taxes.

When the IRS evaluates your ability to pay your tax debt, they consider several factors including your monthly income and expenses and your equity in all of your assets. In general, when the IRS considers you monthly income and expenses it is to figure the Reasonable Collection Potential (RCP). The RCP is how the IRS will measure your ability to pay your tax debt. The RCP includes the total amount of money the IRS can expect to receive if it were to place a levy on your assets. It also includes amounts that the IRS anticipates you will earn in the future minus basic living expenses. The IRS uses Form 433 to determine your most of this information. Even if your assets and anticipated future income qualifies you for an OIC, you may still be disqualified based on other circumstances. For a full questionnaire that will help you determine your eligibility for an OIC, you can visit the IRS website. If tax related circumstances disqualify you, a tax attorney or Enrolled Agent may be able to help. Tax related circumstances that may disqualify you include the following:

  • Must have filed all federal tax returns.

  • Must have made all required estimated tax payments.

  • Must have submitted all required federal tax deposits if you are self employed and have employees.

  • Must not be in an open bankruptcy.

Estimated tax payments are payments made by individuals who meet certain thresholds for having income that is not subject to withholding. The most common forms of income that are not subject to withholding include self employment income, interest, and dividends.

If the IRS accepts the OIC submitted by your tax attorney or Enrolled Agent, you will have a choice of paying the tax debt in a lump sum or within 24 months. Upon reaching an agreement to settle your tax debt with the IRS, you must strictly adhere to the terms and conditions of the agreement. If you do not abide by the terms and conditions of the OIC, then the IRS will consider your OIC to be in default. When an OIC is declared to be in default, the agreement is no longer in effect and the IRS may then collect the amounts originally owed (minus any payments that you made when the OIC was not in default), plus interest and penalties.

Settling your tax debt can entail a long and complicated process. For more information on how the Hillhurst Tax Group located right off of Los Feliz and the 5 Freeway can help you with all of your IRS tax problems, email us at info@hillhursttaxgroup.com or call us to set up a free consultation with our Los Feliz IRS tax attorney or Enrolled Agents at (323) 486-3314.