IRS Offer in Compromise: Too Good to be True?

This IRS has recently warned taxpayers to be wary of “so-called Offer in Compromise ‘mills’ that often mislead taxpayers into believing they can settle a tax debt for pennies on the dollar.” IR-2023-63, March 30, 2023. The Offer in Compromise (OIC) process is not as simple as proposing a dollar amount to the IRS and negotiating back and forth. First, you have to determine whether you are applying for an OIC due to Doubt as to Liability, Doubt as to Collectability, or Effective Tax Administration. Second, there are standard financial forms that you have to fill out truthfully and completely, and third, supporting financial documentation must be provided with the offer.

The most common type of offer is the “Doubt as to Collectability” type of OIC. There are many threshold qualifications that a taxpayer must satisfy to even have their offer considered, such as having filed all of their tax returns that are due. Before even considering this type of OIC, a taxpayer can get an assessment of whether they would be eligible for an OIC by using the IRS Pre-Qualifier tool.

When considering a Doubt as to Collectability offer, the IRS will look at the taxpayer’s Reasonable Collection Potential (RCP). The RCP is a combination of the taxpayer’s equity in their assets and the taxpayer’s anticipated future income less allowable amounts for basic living expenses. If the taxpayer’s RCP shows that they can pay the liability in full, then it is going to be difficult to argue that the IRS should accept a lower amount to settle the debt. If the taxpayer’s RCP is less than the liability, the RCP is a good prediction of the amount that the IRS will accept as the offer amount.

When you are considering hiring someone to represent you before the IRS, consider whether they are promising you a result that is “too good to be true.” As an attorney, I cannot promise or guarantee a result in your case.  Instead, I will evaluate how the law applies to the facts and circumstances of your case and I will be honest about which collection alternative best applies to your situation. If you have questions about the OIC process, please contact my office to schedule a consultation.