Tax Settlement: Offer in Compromise

You have no doubt heard a radio or television advertisement claiming to be able to settle your tax debt for “pennies on the dollar”. I understand that is an enticing thing to hear if you owe back taxes to the IRS and they have started the process to actively try to collect the taxes from you.

The Offer in Compromise program is the IRS program that allows them to accept less than is owed to resolve a tax liability for an individual or a business, but not everyone qualifies.

There are several offer in compromise options: doubt as to collectability, doubt as to liability, and an offer in compromise for effective tax administration. These different types of offers are for different circumstances, but the overwhelming number of offers in compromise are for “doubt as to collectability” which means the IRS will likely not be able to collect the full amount of tax that you owe due to your income, your assets, and the amount of time the IRS has remaining to attempt to collect your taxes.

Before anyone can tell you if you will qualify for an offer in compromise - or begin to evaluate if they can settle your taxes for you - they would have to evaluate your full financial circumstances. The offer in compromise for doubt as to collectability considers your monthly disposable income and the equity you have in your assets in the equation to determine how much you should offer.

A “doubt as to liability” offer in compromise is exactly what it sounds like - it is submitted when there is a genuine dispute as to the existence of or amount of the tax alleged that you owe under the law. The amount offered in this situation is not about what you can pay, but what you assert is the correct tax that you would owe.

The final type of offer in compromise is based on Effective Tax Administration. In this scenario, the taxpayer is not disputing the amount or type of tax that is owed, has sufficient funds to full pay the tax liability, but due to some exceptional circumstance or public policy consideration, paying the tax owed would created an undue economic hardship or would be unfair or inequitable.