HOW THE IRS OFFER IN COMPROMISE PROGRAM WORKS
The IRS's Offer in Compromise (OIC) program is basically an agreement between the taxpayer and the federal government to settle the outstanding tax liability for less than the full amount. However, the IRS will only consider an OIC after other payment options have been exhausted. If the full amount can be paid through an Installment Agreement or other means, you most likely will not be eligible for an OIC.
Generally, offers less than the "reasonable collection potential" (RCP) will be rejected. The RCP is the government's calculation of how much they think they can squeeze out of you without actually killing you. It is based on your assets (bank accounts, real estate, vehicles, available credit, et cetera) AND your future earning potential less a small allowance for living expenses. The IRS states "We generally approve an offer in compromise when the amount offered represents the most we can expect to collect within a reasonable period of time."
In most cases taxpayers must submit Form 433-A. This form collects information such as employment, bank accounts, investments, credit cards, life insurance, bankruptcy, transfers of assets out of your name, vehicles, furniture, tools, jewelry, family budget, etc. You must sign the form under penalty of perjury. Upon completion of this form the IRS may know more about you than your spouse does.
The IRS is only authorized to accept OIC's based on three grounds:
Doubt as to liability. (Genuine doubt IRS has calculated the tax liability correctly.)
Doubt as to collectability. (It is doubtful that the taxpayer could ever pay the full amount.)
Effective Tax Administration. ("...because of exceptional circumstances, requiring payment in full would either create an economic hardship or would be unfair and inequitable." Keep in mind, having to cancel your gym membership or Starbucks withdrawal are not considered hardships.)
There is a $150 fee due with the application (except if applying due to doubt as to liability only or your income is below the poverty line.)
If your offer is for a so-called "lump sum" settlement (oddly enough the government considers 5 or fewer installments to be a "lump sum"), your application must be accompanied by payment of the $150 fee plus 20% of the settlement you are proposing. If you make a "periodic payment offer" (6 or more installments), the application must be accompanied by the $150 fee plus the first installment and you must continue to make the proposed installment payments while waiting to see if the IRS will accept your offer. Any payments submitted with the application (the fee, 20% of lump sum, or installment payments) are non-refundable even if offer is rejected or returned to taxpayer without acceptance (not even processed due to errors, incompleteness, not meeting grounds for application).
If an offer is accepted, the taxpayer must remain in full compliance with tax laws for 5 years or term of OIC whichever is longer. This means if you don't make your OIC installment payments, file tax returns, or you become delinquent on future taxes your OIC could be declared in default. If your OIC is defaulted, it is no longer in effect and the government may then collect the amounts originally owed (before compromise) plus penalties and interest.
