Using an Offer in Compromise to Settle a Tax Bill

Settling a tax bill with an Offer in Compromise is a way for taxpayers to make good on a tax bill that is beyond their means. Basically, it is an agreement between the taxpayer and the IRS; both sides agree to a specific amount. It’s very much like having the bank discount a loan that you have become delinquent on; a lesser amount is settled upon by the borrower and the bank, in order to satisfy the debt.

In the case of an offer in compromise, the IRS and the taxpayer must come to some sort of settlement, which may be a lump sum, or an agreed upon payment plan.

In 2005, the Tax Increase and Prevention Act (TIPRA) law was passed, which made some changes to the OIC program in the form of modifications on what is deemed appropriate for both the taxpayer and the IRS.

The onus is upon the taxpayer to come up with a viable plan that will satisfy the debt; the TIPRA law requires the applicant to send a 20% down payment along with the offer he’s making, if it’s a lump sum. If the taxpayer is requesting periodic payments, the IRS will provide, and the taxpayer must adhere to, a strict payment schedule. If the taxpayer doesn’t keep up with the prearranged payments, the IRS may consider the agreement null and void.

TIPRA has placed some restrictions on who is eligible for an OIC; it is now allowed in only three instances:

*where there is some doubt over the amount of liability owed

*where there is concern that the taxpayer will be unable to meet his IRS obligation without modification

*to expedite settlement, and to facilitate the effective administration of tax law

Although TIPRA did indeed place some restrictions on who is eligible for the OIC program, it also placed some new responsibility on the IRS. If the IRS has not made a decision after two years of deliberation, the offer made by the taxpayer will be deemed as accepted.

“Clarity” is certainly not an appropriate word to define the United States Tax Law, and the IRS is aware of this. According to a recent article published in the New York Times, every year Money Magazine creates a fictional taxpayer with various financial circumstances, then the publication asks a certain number of taxpayers to figure out what the imaginary client would owe in taxes. Every year, the professionals come up with a different answer for the same taxpayer.

All of that to say, if there truly is some doubt over how much a taxpayer owes, or the taxpayer is unable to feasibly pay off the debt, an OIC may be the route to take in order for the debt to be forgiven.