An agreement between a taxpayer and the IRS that allows the taxpayer to pay less than what is owed in taxes is called an Offer in Compromise. Such an agreement can only passed by the IRS if extraordinary circumstances stop the taxpayer from paying in full or using an installment payment agreement.
RCP is reasonable collection potential. The amount that is presented by the taxpayer must be higher than or equal to the RCP. Value that can be appreciated from assets of the taxpayer (e.g. vehicles, bank accounts, real property and additional property) and likely future income without specific amounts permitted for basic living costs are all measured by the IRS to determine ability to pay.
There are three reasons the IRS will allow an OIC:
There must be doubt the taxpayer will ever have the ability to pay the total amount in the rest of the statutory time for collection. A possible scenario may be if a taxpayer accedes that a specific amount (e.g. $20,000) is owed. The monthly income of the taxpayer must be less than living costs, he must not own real estate property and there must be an inability to pay tax owed by means of monthly payments.
The accuracy of the evaluated tax liability must be in doubt. An offer to the IRS must entail – an error by the examiner in understanding the law; if doubt is present; if new evidence must be presented by the taxpayer e.g. if the taxpayer held a corporate position from the year 2004 to 2005. The corporation accumulated outstanding payroll taxes and the taxpayer was reviewed a trust fund recuperation fine due to accountable corporate practice. The taxpayer resigned 12-31-2005 i.e. before the review and was not informed there is legal doubt for an inaccurate reviewed/assessed tax liability
Consideration exists if there is an extraordinary circumstance that may permit an OIC by the IRS if doubt exists that the tax amount is inaccurate. A taxpayer who wants a concession for that reason must show the collection of tax would result in financial hardship or it would be unjust and unfair.
