The Offer in Compromise (OIC) is much publicized because it allows taxpayers to reduce their tax debt. While this certainly sounds attractive, it’s important to remember that an Offer in Compromise is not for everyone and there are strict eligibility requirements to qualify. Those taxpayers who have limited financial ability and meet certain qualifications may seek reduction through an Offer in Compromise.
The IRS reviews the financial status of every applicant, including income from all sources and asset equity before accepting the application for OIC. Expenses and ability to pay are also considered. If it’s discovered that an applicant has the ability to pay the entire tax debt, the IRS may penalize him or her for requesting tax debt reduction.
If the IRS determines that forcing the taxpayer to pay the full debt will create a financial crisis, they may consider reducing the debt to a figure that the individual can pay in a lump sum or in installments. According to the IRS, a financial crisis is one in which the taxpayer cannot satisfy basic living needs such as shelter, food, transportation, etc.
Due to the strict qualifications, only a fraction of Offers are accepted. If you qualify for an Offer in Compromise, though, it can drastically reduce your liability. In order to determine whether an Offer in Compromise is your best option for resolution, you may want to contact a tax professional.
One of the basic requirements when applying for an Offer in Compromise is that you need to be current with all tax filing and payment requirements. Also, you cannot apply for Offer in Compromise if you are in an open bankruptcy proceeding.