An Offer in Compromise (OIC) allows you to settle your tax debt for less than the amount you owe.  However, just because the IRS accepted an OIC for your neighbor, co-worker or friend, does not mean that you will necessarily qualify for an offer.  An OIC may be an option for you if you can show that you are in a financial hardship and are unable to pay your liability in full during the time remaining for the IRS to collect the taxes from you.  (See blog on “Will I Have To Pay Back My Tax Liability Forever?”)

Whether or not you are eligible for an OIC depends on a unique set of circumstances for each applicant.

• What assets do you have and do you have equity in those assets that you can borrow against to pay the IRS? Assets include a residence, rental property, vacant land, an RV, a car, a boat and other similar items.  Retirement accounts, brokerage accounts, checking and savings account are also assets that will be considered in determining whether you qualify for an OIC.
• What is your monthly income and what are your monthly living expenses? Income includes wages, 1099 earnings, income from partnerships or S Corporation, bonuses, commissions, social security benefits, annuity payments, retirement income, royalties, interest and dividends.
• Expenses the IRS will take into account are food and clothing, housing and utilities, ownership costs of a car, vehicle operating expenses, public transportation costs, health and term life insurance, out of pocket health care costs, child or dependent care, current tax payments, student loan payments and certain other expenses. The IRS uses National and Local standards in determining how much of the above expenses to allow.  Credit card payments, payments on unsecured loans, tuition or student loan payments for your children are some of the expenses the IRS does not allow.

If you show an inability to pay your tax debt in full based on lack of equity in your assets and insufficient available monthly income, then the IRS may approve your OIC.

CONDITIONS TO BE MET BEFORE FILING AN OIC

You must be in compliance with both the filing of your tax returns and the payment of current taxes.  That is:

• You must file all tax returns you are legally required to file.
• If you are not paying taxes through withholding from your pay check, you must make all required estimated tax payments for the current year.

You may not file an OIC while you are in bankruptcy, have an open audit with the IRS or have an outstanding innocent spouse claim.