For taxpayers with significant tax debt, an Offer in Compromise (OIC) may sound like a pretty good deal. An OIC provides an opportunity to reduce your tax liability—but it is by no means free.
The Taxpayer Advocate Service defines an OIC as a tool that “allows taxpayers to settle their tax debt for less than the full amount owed.” This promising statement can launch a thousand false hopes if not carefully evaluated. Taxpayers of all wealth profiles can find themselves with overwhelming tax debt and look for a way out of it. It is important to understand an OIC is not like bankruptcy when financial debt is discharged.
Consider these points about an OIC:
- An Offer in Compromise can be an important path to gaining some control of out-of-control tax debt. By crafting an OIC and working with the IRS, you may gain a measure of control over the process and may avoid having property seized and sold by the IRS. As well, working out a compromise and paying as agreed allows you to resolve the tax debt for good.
- It is critical to remember that the OIC program is a means for the Internal Revenue Service to try and collect something on a tax debt that might otherwise go unpaid. The service is not intended to provide a fresh start; it allows examination of your potential payment streams in order to calculate how much you can still pay to the IRS.
- The IRS carefully scrutinizes applications for the OIC program. If you have significant wealth (and corresponding tax liability), it is worth your time to speak with an experienced tax attorney about the advisability of applying for an OIC. During the OIC process, the IRS carefully examines your assets to calculate a “reasonable collection potential (RCP).” The IRS calculates how much you might reasonably be able to pay after examining your assets, possessions, accounts, property, income, and other potential sources of payment. If you have significant wealth, the IRS may find you are able to pay the overall tax debt or pay a higher RCP than you expected.
An OIC may—or may not—be the best option for your wealth profile. Speak with a reputable tax attorney before opening your books to the IRS for review.
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