Code Section 7122 authorized the Commissioner or his delegate the authority to compromise most tax liabilities. An OIC is an agreement between the IRS and taxpayer that allows the taxpayers delinquent tax debt to be compromise for less than the amount owed. The offered dollar amount is based on the taxpayers net worth plus their future income potential.
An offer in compromise is an agreement between a taxpayer and the IRS that resolves the taxpayer's tax debt. The IRS has the authority to settle, or "compromise," federal tax liabilities by accepting less than full payment under certain circumstances. A tax debt can be legally compromised for one of the following reasons:
Doubt as to Liability - Doubt exists that the assessed tax is correct.
Doubt as to Collectibility - Doubt exists that you could ever pay the full amount of tax owed.
Effective Tax Administration - There is no doubt the tax is correct, and no doubt that the amount owed could be collected, but an exceptional circumstance exists that allows the IRS to consider a taxpayer's OIC. To be eligible for a compromise on this basis, the taxpayer must demonstrate that collection of the tax would create an economic hardship or would be unfair and inequitable. The objective of the OIC program is to accept a compromise when it is in the best interests of both the taxpayer and the government and promotes voluntary compliance with all future payment and filing requirements.
Typically there is an application fee of $150.00 for the offer in compromise. The IRS will accept an Offer in Compromise (OIC) when it is unlikely that the tax liability can be collected in full and the amount offered reasonably reflects collection potential. The ultimate goal is a compromise that is in the best interest of the taxpayer and the IRS. Acceptance of an adequate offer will also result in creating, for the taxpayer, an expectation of a fresh start toward complying with all future filing and payment requirements. The OIC process is based on a debt-to-asset formula devised by the IRS.
The Process - The OIC process is complex and time-consuming and can take up to 24 months to resolve. TGC relies on the client to provide detailed financial information required by the IRS. The IRS will not consider an OIC if the client-submitted documents are more than three months old. In addition, the client must be in compliance (all taxes must be filed and quarterly estimated payments, if applicable, have to be current).