Why would the IRS agree to an offer in compromise?

On Behalf of | Aug 20, 2021 | Tax Law |

Taxpayers might find themselves owing significant sums of back taxes. Failing to file tax returns, not making estimated payments or forgetting to report all income could lead to several years of debt. Texas taxpayers might wish to pay off their debt, but taking such action could seem impossible when the debt exceeds their assets. For such taxpayers, an offer in compromise, or OIC, might work.

Exploring options for an offer in compromise

An offer in compromise lets a taxpayer settle a debt with the Internal Revenue Service. For example, a taxpayer might owe $20,000 in taxes and offer to settle the obligation for $11,000. The IRS might approve the settlement offer, and the payment could occur in a single payment or through multiple ones.

An offer in compromise is not an installment agreement. With an installment agreement, the taxpayer pays all the debt owed, along with penalties and interest, over time.

Submitting an offer in compromise does not mean that the IRS will agree to the deal. Taxpayers can expect an IRS examiner to review each application to determine eligibility.

Eligibility and an offer in compromise

Typically, a person seeking an OIC arrangement cannot pay the full debt. The IRS looks at detailed information to determine whether the person has enough assets to cover the obligation. If not, then the OIC may receive approval.

Tax law statutes point out other instances where the IRS may accept an OIC. Serious questions may arise about the legitimacy of a particular tax debt. Perhaps the taxpayer’s account shows money earned that is lower than the reported amount. Whether due to an error or outright fraud, the debt may be illegitimate.

The IRS may prove that the debt is legitimate, but paying the debt might cause economic hardship for the taxpayer. The IRS could accept an OIC agreement in such cases.

Not every taxpayer will be able to settle their debt with an offer in compromise. However, for some debtors, it provides a helpful solution to paying back taxes.