The IRS Offer in Compromise is the last stop if you simply cannot pay back years of unpaid back taxes. If you aren’t already aware, the OIC negotiation allows for the delinquent taxpayer to pay back a portion of what they owe in back taxes. The IRS will accept a portion of the owed taxes if they are satisfied that you cannot pay back your tax debt in full. The IRS accepts an OIC settlement if they feel the taxpayer has offered the equivalent or more of the RCP—the Reasonable Collection Potential.
Estimating the Reasonable Collection Potential
The reasonable collection potential is calculated based on a number of factors but the two most important are the value of your assets and your future income potential. If your assets are worth $50,000 and you make $50,000, you must calculate your basic needs out of your potential income over the collection period. Once your living expenses are subtracted, add the remainder to the total value of your assets. So, for example, you need 20,000 to live, you should submit an OIC that is for 80,000. The IRS, of course, allows that you ‘earn a living,’ but that living will be greatly reduced.
Commonly accepted OIC agreements
Two of the most common situations where an OIC is accepted are when:
1.) There is doubt as to the collectability
2.) Doubt as to the liability
In the first scenario, the taxpayer simply does not have the assets or generate enough income to pay off his or her back taxes directly or through an installment plan.
In the second scenario, which is less common, the taxpayer alleges that that IRS made a mistake reading the tax code, the IRS failed to count existing evidence or the taxpayer has new evidence. In this situation, the taxpayer may have been assessed a tax penalty as part of a group, say a company, but, having left that company before this assessment, is no longer liable.