The Internal Revenue Service (“IRS”) has the authority to accept less than full payment and compromise the taxpayer’s tax liabilities. This authority is significant because the IRS, like any business, has accounts receivable that cannot be collected in full or are disputed. The IRS recognizes that, in such instances, it is an acceptable practice to compromise the tax liability.
The IRS can compromise an assessed tax liability only if there is: (i) doubt as to liability; (ii) doubt as to collectibility; (iii) doubt as to both liability and collectibility; or (iv) if there is no doubt as to either liability or collectibility, then, for the promotion of effective tax administration, when there are exceptional circumstances or economic hardship will result.
An Offer In Compromise (“OIC”) is a legitimate alternative to declaring a case Currently Not Collectible or agreeing to a protracted Installment Agreement (“IA”) that extends beyond the Collection Statute Expiration Date (“CSED”). The ultimate goal is to achieve collection of what is potentially collectible, at the earliest possible time, and at the least cost to the Government.
In general, an acceptable OIC equals or exceeds the taxpayer’s reasonable collection potential. Absent special circumstances, if the tax delinquency can be paid in full via: (i) lump sum payment; (ii) IA extending through the remainder of the CSED; or (iii) other means of collection, then the OIC will not be accepted.
In order for the IRS OIC program to be successful, taxpayers must make adequate payment proposals consistent with their ability to pay and the IRS must make prompt and reasonable decisions. Taxpayers are expected to provide reasonable documentation to verify the ability to pay. An appropriate OIC reflects that which is in the best interest of both the taxpayer and the Government. An accepted OIC also results in creating an expectation of a fresh start toward compliance with all future filing and payment requirements.