An Offer in Compromise (OIC) is an agreement of settlement between a taxpayer and the Internal Revenue Service (IRS) that resolves the taxpayers's tax liability. The IRS has the authority to settle or compromise federal tax liabilities by accepting less than full payment under certain circumstances. The IRS may legally compromise for one of the following three reasons.
• Doubt as to Collectibility:
Doubt if the full amount of the liability will be paid based on present and/or future assets and income. The minimum offer amount must generally be equal to (or greater than) the taxpayer's reasonable collection potential (RCP). The RCP is defined as the total of the taxpayers's realizable value in real and personal assets, plus his/her future income.
Note: Unless the taxpayer files an OIC claiming special circumstances, the offered amount must equal or exceed the reasonable collection potential. Realizable value is the asset's quick sale value (amount which could be reasonably expected through the sale of the asset) minus what the taxpayer owes to a secured creditor.
• Doubt as to Liability: Doubt exist that the assessed tax is correct. (Examples: Innocent Spouse, Social Security was stolen and used by someone else)
• Effective Tax Administration: There is no doubt that the tax is correct and no doubt that the amount owed could be collected in full, but exceptional circumstances exist such that collection of the full amount would create economic hardship or where compelling public policy or equity considerations provide sufficient basis for compromise. The taxpayer bears the burden of proof to show their OIC qualifies for public policy or equity considerations. They must show that their circumstances are compelling enough to justify acceptance of their OIC compared to other taxpayers in similar circumstances. (Example: Elderly couple with equity in the home living on Social Security Disability with no other means of income)
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