The IRS offer in compromise program allows Taxpayers (individuals and businesses) to settle their outstanding balance for less than the full amount owed. Although this may appeal to many Taxpayers, stringent requirements must be met before the IRS will approve an offer. First, an applicant must be current with all IRS filing and payment requirements. This includes estimated tax payments, if applicable. In addition, persons who are in active bankruptcy proceedings are not eligible for an offer in compromise. These two items are determinative and the IRS will return your offer in compromise without consideration if either of the aforementioned apply.
The next requirement is a mechanical calculation of a Taxpayer's financial situation. This includes evaluating whether the Taxpayer has the ability to full pay the debt within the collection statute of limitations when taking into account his or her income, expenses and assets. Please note that certain "discretionary" expenses above the IRS national and local standards are often not considered "necessary" for the purpose of evaluating an offer in compromise. In addition, the IRS will not approve an offer in compromise if a Taxpayer's assets, including equity in real property, vehicles, retirement accounts, investments and bank accounts exceed the amount owed. Furthermore, if the Taxpayer's income minus necessary expenses can full pay the liability within the 10-year collection statute of limitations, the IRS will favor an installment agreement over an offer in compromise.
For some taxpayers, especially those who owe large liabilities and whose assets are encumbered by loans or mortgages, the mechanical calculation qualifies them for an offer in compromise. However, the IRS has discretion to accept or reject using the "best interest of the government" clause. These reasons may include whether a person is likely to increase his or her income in the future, past compliance history and type of liability. Therefore, it is often prudent to consult with tax counsel to determine whether an offer in compromise is truly something the government can consider.