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How to Make a Successful Offer in Compromise

One of the most common tools to reduce outstanding tax debt is to put forth what is called an “Offer in Compromise” (OIC) to the IRS. Just as it would seem, an OIC is very literally an offer made to the IRS which gives a foundation for why a given taxpayer’s debt should be settled for less than its face amount. Depending on your circumstances, an OIC can be an extremely effective means to lower preexisting tax debt and pave the way for a more secure financial future. Whether your OIC will be successful ultimately depends on a variety of factors, and these factors are listed in IRS Form 433-A; in this article, we will identify and discuss how to make a successful Offer in Compromise.

Before we dive into those topics, however, let’s quickly go over the several different types of OICs.

Three Different OIC Categories

When making an OIC, taxpayers have the option to select one of three distinct variations. They can choose to make a cash offer, a short-term deferred payment offer, or a standard deferred payment offer. Short-term deferred offers require full payment within 5 months and standard deferred offers require full payment within 6 to 24 months.

The Factors Which Govern OIC Analyses

When you submit an OIC, the IRS will perform an independent analysis and consider all of the relevant factors of your situation. The analysis can be split into different components; certain factors will play a role consistently in every OIC, and then certain other requirements will only apply depending on which variation you select.

Two things which will always be relevant are the size of the debt and the precise amount of your “excess income.” Your excess income is the sum remaining after deductions for reasonable living expenses. The IRS will weigh your total outstanding tax debt against your excess income to determine whether an acceptance be warranted. In other words, the determination of whether a given OIC be accepted ultimately depends on the taxpayer’s ability to pay, and this ability is derived by examining both your total liability and your income.

As mentioned, the different OIC variations require different amounts of excess income. If your OIC is a cash offer, then you will need to include 12 months of your excess income. You will also need to include 12 months of income for short-term deferred offers. Standard deferred offers, on the other hand, require 24 months of excess income.

Tips on How to Make a Successful Offer in Compromise

Without a doubt, OICs should be seriously considered as a potential way to resolve your back tax debt in many situations. When they succeed, OICs confer high value to taxpayers as they can relieve the stresses associated with debt and provide a much needed clean slate. For these reasons, it’s important that you try to make use of any tips available on how to make a successful Offer in Compromise.

Fortunately, in recent years, the IRS has modified the requirements of OICs in ways which very much favor taxpayers. The IRS acceptance percentage rate has increased substantially in tandem with these favorable changes. In point of fact, between 2012 and 2014, the IRS acceptance percentage averaged out to 40 percent. This average is notably higher than the averages for the two decades prior to 2010 and 2000.

So how can you and other taxpayers go about improving your likelihood of acceptance by the IRS? To maximize your odds, taxpayers can do a number of different things. Perhaps most critically, taxpayers should be certain that the sum of excess income is accurately calculated; toward this end, you need to be sure that you take advantage of all of the current exclusions available to you. The IRS has added all sorts of new exclusions (i.e. student loan exclusion, car equity exclusion, state and local tax liability exclusion, etc.) and so it’s also important that you consult with a tax or legal professional fully conversant with the most up-to-date OIC requirements prior to submitting an OIC.

Along with an accurate excess income calculation, you should also take care to keep your reputation and criminal record as squeaky clean as possible. If you’re someone who has been convicted of a serious offense, then this is one factor which can potentially be used against you. Previous bad behavior can create a presumption against the veracity of your figures, and a NYC tax attorney in our office can help.

This sketch does well to give a basic sense of how to make a successful Offer in Compromise. In the future, we will explore OICs in greater detail by looking at some of the requirements more closely and examining well-known OIC cases.

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