How the IRS Evaluates an Offer in Compromise

Will My Offer In Compromise Get Accepted?

The IRS has very specific guidelines for accepting or rejecting an offer in compromise.  Understanding these guidelines and what the IRS considers to be in it’s best interests can help make sure your offer has the best chance of getting accepted and eliminating your tax debt once and for all.

Three Reasons for Accepting of an Offer in Compromise

Generally, the IRS will accept an offer in compromise for three reasons.  The first and most common reason is “doubt as to collectability.”  This is where the taxpayer demonstrates that he or she will not be able to pay the tax owed now or in the future — and the IRS is better off settling the tax debt than trying to keep collecting from them.  The evaluation is based on a full review of the taxpayer’s financial situation (including income, expenses, assets, and other debts).

The second reason is “doubt as to liability.”  Offers are accepted for his reason when the taxpayer can prove that he or she should not actually owe the tax, either because the tax law was misapplied or the IRS made a mistake in assessing the tax against the taxpayer.  The IRS does not look at the financial position of the taxpayer in these types of offers.

Lastly, there is “effective tax administration.”  Offers are rarely accepted for effective tax administration because it applies only when the taxpayer can point to some exceptional circumstances that justify forgiveness of the their tax debt, regardless of their financial position or liability for the tax owed.

The criteria for “doubt as to collectability” are discussed in more detail below.

Doubt as to Collectability

Doubt as to Collectability is by far the most common reason that the IRS accepts an offer in compromise, and the most likely reason that your offer will be accepted.  When doubt as to collectability is involved, the evaluation comes down to the taxpayer’s “Reasonable Collection Potential” (RCP).  The idea behind RCP is to figure out the taxpayer’s ability to pay and compare that to the amount of the taxpayer’s offer.  If the IRS believes the taxpayer can pay more than the offer, it will be rejected.

When calculating “Reasonable Collection Potential,” the IRS starts with a review of the taxpayer’s financial position.  This includes all sources of income, living expenses, assets, and other debts.  Next, the IRS calculates the taxpayer’s monthly disposable income.  This is done by taking all sources of income and subtracting allowable living expenses.  The IRS then assumes that the taxpayer can make payments of this amount over the next 12-24 months.  So, the offer must be more than 12-24 months worth of the taxpayer’s disposable income in order to get accepted.  Read more about How Much to Offer.

Additionally, the IRS will consider whether the taxpayer can sell any of his or her assets.  The IRS will generally assume that a taxpayer can sell things like second cars, recreational vehicles, and valuable collectibles.  They also will take into account investments portfolios and retirement accounts, even if the taxpayer has not reached retirement age.  The IRS cannot generally force taxpayers to sell their primary residence, but they can include the value of the taxpayer’s home when deciding whether or not to accept an offer in compromise (with the understanding that the IRS will get to collect any profit on the home when and if the taxpayer sells it).

At the end of the day, the IRS will accept an offer in compromise for doubt as to collectibility only if they are convinced that the taxpayer does not have the ability to pay more now or in the next 12-24 months.  This requires a careful showing on the part of the taxpayer of his or her financial condition, as well as negotiations with the IRS once the offer is under consideration.

For more information on the IRS Offer in Compromise program, please see:

  • Overview of the Offer in Compromise Process
  • Eligibility Requirements
  • The Offer Amount
  • Alternatives to the Offer in Compromise