An Offer in Compromise (OIC) is a program that allows taxpayers to settle their tax debt for a lump sum which is less than the total amount owed. The IRS will look at your ability to pay, income, expenses, and assets to determine how much they are likely to recover from you. If the IRS is convinced that you are offering them more than they can reasonably expect to recover from you, they may accept your OIC to settle your tax debt.
Why the IRS Accepts OICs
There are three reasons that they IRS will consider accepting your OIC. First, if you can show that you do not actually owe the money to the IRS. This is referred to as an offer in compromise based on doubt as to liability.
Second, and more common, is an OIC based on doubt as to collectability. You are essentially telling the IRS that you do not have the ability to pay your tax debt, so they should accept your lump sum offer. This is common among retirees who are living off of Social Security. However, if you are younger and have the opportunity to earn more income in the future, the IRS will be more skeptical of your claim for doubt as to collectability. Even so being youthful is not a bar to having an OIC accepted.
Finally, there is an OIC based upon effective tax administration (ETA). If you have the ability to pay your tax debt, but it would cause you an undue hardship, the IRS may consider an OIC for this reason. You will have to describe you situation and provide proof that paying the full amount of your debt will cause you hardship. This type of OIC may be used if you have a serious illness or disability.
Why You Should Consider an OIC
If you have a substantial amount of tax debt that you do not have the ability to repay in full, you should consider submitting an OIC to the IRS. It is up to the discretion of the IRS whether or not they accept your offer, but an experienced tax lawyer can examine your situation and tell you whether you meet the general requirements for an OIC.