What is an Offer in Compromise?
An offer in compromise (OIC) is an agreement made between the Internal Revenue Service (IRS) and a taxpayer to settle the taxpayer’s taxes for less than the full amount owed. Before filing an Offer in Compromise taxpayers should be aware that an offer will not be accepted if the IRS believes that the liability can be paid in full as a lump sum or with some sort of payment plan.
To determine the amount they will accept, the IRS will evaluate the tax issue. This includes the value of the taxpayer’s assets including real property, bank accounts, automobiles, recreational vehicles, and other property, as well as anticipated future income. The IRS will not accept an offer in compromise unless the amount offered is comparable to (or better than) the reasonable collection potential.
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Three Types of OICs
The IRS considers three different and distinct types of offer in compromise:
1. Doubt as to Collectibility – The IRS has doubt that it can obtain on the full amount of tax liability owed within the remainder of the statutory period.
2. Doubt as to Liability – There is a legitimate doubt that the taxes are accurate. This could be the case if: (1) a mistake was made in the initial interpretation of the law, (2) the taxpayer’s evidence was not considered or (3) if the taxpayer can produce new evidence.
3. Effective Tax Administration – The taxpayer owes the taxes and there is potential to obtain the full amount of the taxes, but due to exceptional circumstances payment could cause an economic hardship or would be unfair and inequitable.
Expat OIC Payment Options
An application fee and initial payment must be submitted along with the Form 656, Offer in Compromise. Upon acceptance, taxpayers may choose to pay their offer in compromise in one of three ways:
1. Lump Sum Cash Offer – The money owed is due in non-refundable installments and the entire offer amount must be paid in five or fewer installments.
2. Short Term Periodic Payment Offer – The taxes agreed upon according to the offer in compromise is payable in non-refundable installments.
3. Deferred Periodic Payment Offer – The offer amount is payable in non-refundable installments; the offer amount must be paid over the remaining statutory period for collecting the tax. Regular payments must be made during the investigation.
Expats can certainly file offers in compromise. But they are tough to do.
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