Offer In Compromise

An offer in compromise is an agreement between a taxpayer and the Internal Revenue Service (IRS) that resolves the taxpayer's tax liability. Under certain conditions, the IRS is authorized to compromise federal tax liabilities by collecting less than full amount of payments.

The purpose of Offer in Compromise is to collection what is probably collectible at the earliest possible time and at the least cost to the government. The IRS will accept an Offer in Compromise when the tax liability is unlikely to be fully collected and the amount of the Offer in Compromise reasonably reflects collection potential. To determine the Reasonable Collection Potential, the IRS take into consideration the following two factors: Realizable Value of taxpayer’s assets and taxpayer’s Future Income.

The Realizable Value of taxpayer’s assets equals the net equity of all taxpayer’s assets that are the starting point for consideration of any Offer in Compromise. To determine the amount of an acceptable Offer in Compromise, the liquidating or quick sale value of assets is used.

The IRS also takes into consideration the taxpayer’s future income, precisely the part of it that can be collected, to determine an acceptable Offer in Compromise amount. The taxpayer's age and experience, health, education, profession or trade, and past and present income will be considered to evaluate those future income prospects. Also, an evaluation of the likelihood that any increase in real income will be directed to pay the delinquent taxes will be made in evaluating the future income.

IRS usually calculates the amount it could seize from future income by subtracting necessary monthly living expenses from monthly income over a set number of months. Generally, the disposable monthly income is multiplied by either 48 or 60 months to determine the future income.

The IRS may legally accept an Offer in Compromise and settle the liability if the taxpayer proves the following to the IRS:

• The taxpayer cannot pay the liability in full;
• It’s doubtful that the taxpayer actually owes the liability;
• The settlement would promote effective tax administration.

The taxpayer must remain current on all tax obligations for a period 5 (five) years after acceptance of an Offer in Compromise. So, if the taxpayer's Offer in Compromise is accepted and paid in full, but he later fails to pay current income taxes or other taxes, the IRS might revoke the Offer in Compromise.

However, a taxpayer does not qualify for Offer in Compromise consideration based on a doubt as to collectibility or effective tax administration if:

• Taxpayer has not filed all federal tax returns, or
• Taxpayer is involved in an open bankruptcy case.

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Offer in Compromise related links
Offer in Compromise Help at TaxHelpers.com
Offer in Compromise at MyTaxProblem.com