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An Offer in Compromise is an offer from a taxpayer to the IRS to settle all of the taxpayer’s outstanding liabilities to the U.S. government.
Both businesses and individuals can file for Offers in Compromise.
There are three basic types of Offers in Compromise:
1) Doubt as to Collectibility
2) Doubt as to Liability
3) Effective Tax Administration
Doubt as to Collectibility
There is one sure-fire way to have an offer in compromise accepted:
1) Be in current compliance with all Federal Tax Laws and Treasury Regulations (file and pay returns on time, etc); and
2) Have no (or very little) assets and no (or very little) expendable income.
In DATC situations, the taxpayer (or taxpayer rep) fills out a Form 433-A (OIC) and submits it along with a Form 656 and $150 processing fee to the IRS. The IRS has specific standards that are automatically granted without documentation. Other living expenses must be substantiated, and are limited by a cap depending on the taxpayers geographic area.
If you truly live paycheck-to-paycheck, and you are no longer accruing new tax liabilities, then an Offer based on Doubt as to Collectibility may be an option for you.
(Some planning is available to boost reasonable living expenses, advice that a Tax Attorney or CPA may be able to provide.)
Doubt as to Liability
A Doubt as to Liability claim is unlikely to succeed. If a taxpayer was provided with the opportunity to participate in an audit, then this option is basically out the window. Generally, there are better avenues to fight the underlying tax liability – such as an audit reconsideration. But in the case of identity theft – for example – a DATL Offer might be the best approach. While the language laid out by the IRS explaining when the IRS will accept a DATL offer is vague, the IRS tends to use this vague language to the detriment – not the benefit – of the taxpayer.
Effective Tax Administration (Type 1)
When analysis under a DATC approach shows that a taxpayer can pay his liability in full, the IRS has the option of accepting Offers on the theory that the special facts and circumstances of the taxpayer’s financial or health situation, combined with a full payment of the tax owed would cause financial hardship for the taxpayer. So, for example, if a taxpayer has $70,000 in the bank and a tax liability of $50,000, the IRS would usually consider the taxpayer a candidate for full payment. If, however, that same taxpayer requires surgery and physical therapy in order to keep earning money, and that medical care will cost the taxpayer $70,000, the IRS has the discretion to accept an Offer for less than full-payment of the liability.
Effective Tax Administration (Type 2)
While the IRS generally positions ETA Offers as relating only to special circumstances that create a financial hardship, ETA offers man also be accepted by the IRS if full collection of the tax due would be generally accepted as “unfair” (or inequitable).
Doubt as to Collectibility with Special Circumstances (DATC + ETA = DATCSC)
DATCSC Offers combine the approach of DATC offers and ETA offers. This type of solution is for taxpayers whose financial analysis indicates an inability to pay the tax due and who also has special circumstances that reduce the amount that can be paid to satisfy the taxes without causing financial hardship.