The IRS agrees to accept less than the full amount of outstanding taxes, interest and penalties when it is confident it will never be able to collect the taxes you actually owe, says attorney Elliott H. Kajan, a principal with the Beverly Hills, California, law firm Kajan Mather and Barish, who has helped negotiate a number of OICs.
The goal of an OIC is to reach a compromise that's in the best interest of both the taxpayer and the government, says an IRS official. "If we can collect more [funds] through other means, we would have to explore those other means of collection," he says. If the IRS finds, for example, that it can collect the entire amount you owe through liquidation of your assets or from future earnings, it will pursue those options instead of agreeing to an OIC.
A taxpayer's financial problems have to be fairly serious for an OIC to be accepted. Kajan likens it to a bankruptcy procedure. "The taxpayer must be so far in over his or her head with taxes that there is no way he or she will be able to crawl out of that hole," says Kajan, "so the IRS says `Let's give them an economic fresh start with the OIC program.' " One of Kajan's clients, for example, had a $15 million tax obligation but was able to pay only $900,000, which the IRS accepted as full payment under the OIC program.
To determine exactly how much it will accept in compromise, the IRS considers the total value of the equity you have in all assets as well as your future earnings potential. For example, if a taxpayer owes the IRS $38,000, and the IRS determines that liquidating his or her assets would only raise $5,000 and that the discounted value of future collectible income for a five-year term would only total $7,000, the taxpayer's offer to immediately pay $12,000 borrowed from a relative stands a good chance of being accepted.
Working out an offer can be a lot like playing tug of war. "The taxpayer wants to pay the least amount possible, and the IRS wants the most amount paid," says Kajan. It may be wise to hire an attorney or accountant to help you complete the forms and successfully negotiate an offer.
The IRS also encourages you to include a deposit when seeking an OIC. It believes this action reflects your good faith effort to reach a compromise. The deposit goes into a noninterest-earning fund until the IRS makes its determination on your case.
In the end, an OIC can be a win-win situation. The program gives taxpayers a new start, and the IRS gets a chance to collect some money when a tax bill far exceeds the amount a taxpayer is ever able to pay. According to IRS statistics, it accepted a record 27,673 OIC offers in 1996, a 48 percent acceptance rate. These offers totaled $287 million and settled outstanding tax debts of $2.17 billion. So far this year, 19,869 offers have been accepted, a 47 percent acceptance rate. To date, the 1997 offers represent $228 million and settle debts of $1.5 billion, says an IRS official.