Making an offer in compromise: eligibility criteria and acceptance trends

An offer in compromise (OIC) is a way to potentially resolve your tax debt with the IRS for less than the full amount owed. It is a potential resolution, not a certain one because the IRS is not obligated to accept the offer.

In this post, we will inform you about the upward trend in OIC acceptance rates and the role that an experienced tax attorney can play in using an OIC effectively.

The IRS considers multiple factors when deciding whether to approve an offer in compromise. In general, the agency says it is inclined to approve an OIC when the amount that you have offered to pay reflects the amount the IRS reasonably believes it can collect without having to keep trying for an excessive amount of time.

To be eligible, you will have to show that you either can't pay the full amount of your tax debt or that having to make those payments would be an undue hardship, given your financial means.

Determining what a reasonable collection amount is in your situation involves a process of negotiation that is best handled on your end by a skilled tax attorney. This is not only because dealing with the IRS can be challenging. It is also because a tax attorney can guide you through a consideration of your other options, such as working out an agreement to pay your tax debt in installments.

An encouraging trend, however, is that OIC acceptance rates have been increasing in the last few years. As The New York Times reported a few months ago, the acceptance rate reached 42 percent in 2013. As recently as 2010, it was only 25 percent.

This increase did not come out of the blue. It reflects deliberate changes made by the IRS to make the OIC program more flexible.

For example, in 2012 the IRS scaled back the calculation it uses for evaluating a taxpayer's future income, a key factor in determining the reasonable collection potential of tax debt. Prior to 2012, for OICs paid in six to 24 months, the IRS projected a taxpayer's income for the next five years. The IRS now looks ahead at only two years of future income for OICs in that payment duration category.

The future income calculation is only one example of how the IRS has been easing the rules on OICs. The trend continued again last year, with changes to the discount allowed on various types of taxpayer assets.

For more information on these changes, you can, of course, visit the explanatory booklet for Form 656. But in order to prepare your OIC with confidence, it makes sense to get counsel from an experienced tax lawyer.