Who Qualifies for an IRS Offer in Compromise?

If you owe the IRS, chances are you’ve heard of an offer in compromise. After all, it’s the only form of tax relief that settles IRS debt for “pennies on the dollar.” However, qualifying for this popular form of tax relief is challenging, and truth be told, many people with tax debt will not qualify.  

But first… 

What is an Offer in Compromise? 

An offer in compromise is an agreement between you (the taxpayer) and the IRS to settle your tax liability for less than the amount owed.   

The IRS will not accept an offer in compromise unless the amount that you offer is equal to or more than the reasonable collection potential (RCP).  Reasonable collection potential can be understood as your ability to pay the IRS and includes the value of your realizable assets, such as real property, automobiles, bank accounts, and other assets, and anticipated future income (excluding the amounts allowed for basic living expenses).    

Pre-Qualifications 

There are some requirements you must meet before you can apply for an offer in compromise.  

  1. All your tax returns must be filed. 
  1. All your required estimated tax payments for the current year are made. 
  1. All required federal tax deposits for the current quarter are made (for business owners with employees only). 

Acceptable Basis for an Offer in Compromise 

The IRS will not outright accept your offer in compromise. It may only do so if the offer in compromise is based on any of the following reasons: 

  • Doubt as to a taxpayer’s liability.  There is doubt about the taxpayer’s liabilities if there is a genuine dispute that the correct tax debt exists under the law. 
  • Doubt as to the collectability of tax liabilitiesWhen a taxpayer’s assets and income are less than the total tax liability, a doubt that the IRS could collect taxes from the taxpayer arises. 
  • Effective tax administration. The IRS may accept this ground if it is clear that the taxpayer legally owed taxes, which are collectible, yet requiring payment in full would either create an economic hardship or be unfair and inequitable due to exceptional circumstances. 

Return and Rejection of an Offer in Compromise 

There are cases wherein the IRS returns, instead of rejecting, an offer in compromise. If your offer in compromise is returned, you do not have the right to appeal. However, you may re-submit the offer in compromise once corrections have been made. Return of an offer in compromise usually occurs when: 

  1. The taxpayer didn’t submit the necessary information. 
  1. The taxpayer filed for bankruptcy. 
  1. The taxpayer failed to include a required application fee or non-refundable payment with the offer. 
  1. The taxpayer has not filed required tax returns or has not paid current tax liabilities while the IRS was considering the offer.  

On the other hand, in cases of a rejection, the IRC notifies taxpayers by a mailed letter. If your offer in compromise is rejected, you will receive a letter stating the grounds for the rejection. You may file an appeal to the IRS Office of Appeals within 30 days from the date of the letter of rejection. 

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