Offers in Compromise

There are situations that arise in which a taxpayer has accumulated a massive tax debt that is way beyond his or her ability to pay.

The same Collection Standards that are used in Installment Agreements (which see) are applied to Offers - allowances for food and clothing, housing, transportation, medical expenses and legally required outlays such as child support, student loans, alimony and court judgments. If the allowance thus determined equals or exceeds the monthly net after tax income then the Service would probably grant relief in the form of an Offer in Compromise.

The failure rate for Offers in Compromise is very high. The Service's most recent published figures reveal that over 83% of Offers are rejected.

The two main reasons they are rejected is that, the documentation is incomplete or the taxpayer earns more than the allowance.

The I.R.S. for years accrued penalties and interest on all tax debts, year after year, until the reported sum of the taxes receivable reached hundreds of billions of dollar. In many cases the penalties and interest were three or four times the original tax.

But the I.R.S had no legal mechanism to declare a tax debt uncollectible, to write off the receivable as private industry does when it realizes its accounts receivable are not going to be collected. In fact, Generally Accepted Accounting Principles and the Securities and Exchange Commission demand such write down. The government has no such mandate and so the receivables build up year after year.

Nevertheless, in the mid 1990's the IRS and the Congress came to realize that half a loaf was better than none and that it made sense to forgive debt if at least some portion of the tax was recovered. From this realization sprang the Offer in Compromise program.

As the criteria for an installment plan may center on the concept of 'ability to pay', so does the Offer in Compromise (OIC) program.

The difference between the two is largely that if the taxpayer's ability to pay over 5 years is less than his tax obligation, at least some portion of the tax debt will be forgiven, or compromised.

In an Installment arrangement the ability to pay over time is greater than the tax owed.

One good source of information on this subject is e Taxes.com President, Steve Kassel. He previously served as an IRS Revenue Officer in San Jose, CA. Steve testified on Capitol Hill before the National Commission on Restructuring the IRS. You can read his article about recent changes the IRS has made in the OIC program here.