What is the IRS Offer in Compromise Program?
An Offer in Compromise (or OIC) is a legal mechanism by which the IRS may reduce your back tax liability based upon your financial circumstances. The IRS determines the minimum acceptable offer amount based upon an income/expense and asset analysis. In short, if you are “month to month,” meaning little or no disposable monthly income after your monthly expenses and have no appreciable equity in any asset, you are a good candidate for an acceptable OIC. However, the IRS will look to see if your expenses fall within what they consider “reasonable”. Once accepted by the IRS, it is a binding contract.
What are reasonable living expenses?
The IRS has created National Standard expenses for food and essentials, housing and vehicle expenses and payment. This ensures that the OIC program is fair to everyone.
The IRS has determined, based upon where you live, what reasonable living expenses should be. Most taxpayers find that the IRS allowances are reasonable and most fall within those standards. The IRS implemented the National Standards as part of the OIC formula to ensure, as an example, that an OIC applicant does not trade in his/her $400 car payment for an $800 car payment only to tell the IRS that he/she is now “month to month” and therefore qualifies for a lower offer amount.
Exceeding the IRS national standards for reasonable living expenses does not preclude an acceptable offer. It may, however, increase the minimum offer amount.
What are allowable expenses?
To further ensure the OIC process is fair for everyone, the IRS only allows expenses for living needs and production of income. This includes business expenses.
For example, paying for your daughter’s college tuition may be a factor in being father of the year in your daughter’s eyes, but not in the eyes of the IRS. Remember, paying for non-allowable expenses may not automatically preclude an acceptable offer but it will increase the minimum offer amount.
Look at it this way, if the IRS were to accept the taxpayer’s OIC based on allowing your daughter’s tuition expense, then, in effect, the IRS is subsidizing your daughter’s college tuition by accepting that offer. That would not seem fair to others who do not pay for or have a child’s tuition expense.
To sum it up…
Offer in Compromise (OIC) acceptance is a formula driven process. A key part of this formula is your expenses. To help ensure fairness, the IRS has determined certain standards and allowable expenses that are applicable to everyone. Just remember that it is not a negotiation like some would have you believe. It is a formula based upon your income expense and asset analysis.
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