The minimum offer amount must generally be equal to, or greater than, a taxpayer's reasonable collection potential (RCP). The RCP is defined as the total of the taxpayer's realizable value in real and personal assets, plus future income.
The IRS may legally compromise for one of the following reasons: doubt as to liability, when doubt exists that the assessed tax is correct; doubt as to collectibility, when doubt exists that the taxpayer could ever pay the full amount of tax owed; or effective tax administration. Under effective tax administration, there is no doubt that the assessed tax is correct and no doubt that the amount owed could be collected, but the taxpayer has an economic hardship or other special circumstances which may allow the IRS to accept less than the total balance due. Absent special circumstances, taxpayers that have the ability to pay the tax liability in a lump sum through an installment agreement will not be eligible for an OIC.
Taxpayers requesting an OIC must have filed all required federal tax returns. If in business, they must also have filed and paid any required employment tax returns on time for the two quarters prior to filing the OIC, and be current with deposits for the quarter in which the offer in compromise was submitted. Taxpayers must also not be a debtor in a bankruptcy case.
Taxpayers may choose to pay the offer amount in a lump sum, in monthly payments over the remainder of the statutory time allowed for collection, or a combination of a lump sum and monthly payments. Generally, it is to the taxpayer’s advantage to pay the amount in the shortest time possible because longer payment terms will require a larger offer amount.
Ordinarily, the statutory time allowed for collection is suspended during the period the OIC is under consideration, and is extended further if the OIC is later submitted to the Appeals Office. If the IRS grants a fresh start by accepting the OIC, it is expected the taxpayer will have no further delinquencies. If taxpayers do not abide by all the terms of the agreement -- including filing all future returns and making all payments when required for 5 years or until the offered amount is paid in full, whichever is longer -- their OIC may be declared in default. If the IRS rejects the OIC, taxpayers will be notified by mail. In the IRS letter, it will explain the reason for the rejection and provide detailed instructions on how to appeal the decision.
