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BACK TAXES AND TAX DEBT

Will the IRS Accept More Offers in Compromise Post-Covid? Here’s Why and Why Not

Jim Buttonow, CPA, CITP SVP Post-Filing Tax Services Published On September 09, 2021

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The IRS Offer in Compromise (OIC) has always been a program with much controversy and confusion. Currently, there are over 20 million individual and business taxpayers who owe the IRS, but very few get an Offer in Compromise.

There are actually 3 types of OICs:

  • OIC for Doubt as to Liability: a tax settlement where the taxpayer disputes the tax assessed.
  • OIC for Effective Tax Administration: a tax settlement where the taxpayer and the IRS agree that the tax owed is correct and could be paid in full. However, the taxpayer requests a settlement for less than owed because collecting the tax would cause economic hardship or public policy/equity considerations warrant paying less than the amount owed.
  • OIC for Doubt as to Collectability (OIC-DATC): a tax settlement where the taxpayer’s financial situation does not allow them to pay the balance owed with assets and future income.

The OIC-DATC is by far the most popular OIC. For the past two decades, it has been the subject of many radio and TV commercials claiming taxpayers can settle their tax debt for “pennies on the dollar.” In fact, OIC Mills are on the IRS’s list of the top dozen tax scams for 2020. Learn more about the realities of the OIC program to see how it’s used and abused.

A quick word about the few OICs applied for and accepted for doubt as to liability and effective tax administration (ETA): they are rarely requested, and few are approved. In fact, in 2020, the IRS approved only 531 ETA OICs. Liability challenges are often completed in IRS appeals or with audit reconsideration. So few ETA OICs are accepted that the IRS can review them all with one IRS specialty group in Texas. 

Doubt as to Collectability are the most commonly considered OICs. This IRS collection alternative is attempted by tens of thousands of taxpayers each year, and very few are accepted.

A rarity: IRS OIC applications and acceptances for 2010-2019

OIC-DATC acceptance rates

In general, IRS OIC acceptance rate is fairly low.  In 2019, only 1 out of 3 were accepted by the IRS.

In 2019, the IRS accepted 33% of all OICs.

There are two main reasons that DATC OICs are not accepted. First, the taxpayer does not qualify. The second reason is the taxpayer cannot pay the calculated offer amount. If you want to learn more about the fundamentals of an OIC, you can see a simple qualification and offer amount example here.

In the current environment and pending aftermath of the COVID-19 pandemic and its negative effect on many taxpayers’ finances, a simple question has emerged: will more people qualify to settle their tax liability using an OIC?  Here are some reasons why it is and isn’t likely that the OIC-DATC is more accessible to taxpayers after the pandemic.

You may be able to get an OIC if….

If your financial situation has changed so that it will be impossible for you to pay the IRS the balance owed in the future, you may qualify for an OIC-DATC. That is, you have suffered significant, long-term financial harm that has put you in the position of being unable to pay your outstanding tax bill in the future.

How do you define the “future”? “Future” is a projection of how much can be paid by the taxpayer to the IRS before the IRS’s collection statute expiration date (normally ten years from the date of each assessment). For example, assume a taxpayer owes the IRS $25,000 and has 5 years (60 months) left on the collection statute. If the taxpayer has $5,000 in assets and $100 that they can pay the IRS a month in a payment plan, the taxpayer will only be able to pay the IRS $11,000 in the “future” ($5,000 from the sale of assets plus 60 months of $100/month). This projected shortfall to the IRS qualifies the taxpayer for an OIC-DATC because they cannot pay their total balance before the statute expires for collection.

In order to qualify for an OIC-DATC, a taxpayer’s situation cannot be temporary. That is, the inability to pay must not be a short-term situation. Taxpayers who are unemployed but are likely to obtain similar future employment in the future, will not make good OIC candidates (assuming they were not a good candidate before the unemployment). Taxpayers with temporary situations and even “under-employment” are generally not good candidates because the IRS may use the level of income expected if the taxpayer were fully employed to calculate how much the taxpayer can be expected to pay (if the potential for employment is apparent).

How does the IRS challenge a temporary financial situation on an OIC application and investigation? Many taxpayers have suffered lost jobs and several months of income due to the effects of the COVID-19 pandemic. In the OIC application, wage earners need to show their average, regular monthly income over the past 3 months. When submitting the application, the taxpayer may show very little income over the past 3 months that would show they qualify for an OIC (and likely a low offer amount). However, the IRS offer examiner may counter the computation of “future income” by proposing that the taxpayer compute their average income over a more “normalized” period i.e., one year or more. This average may increase the taxpayer’s collection potential by increasing their “projected future income.”  Unless the taxpayer has special circumstances that warrant an OIC, they will have to contest the OIC examiner’s assertions by showing that their situation is not temporary. If they cannot show how their income will remain low, they may fail to qualify for an OIC or may be faced with an offer amount that is too high to pay to settle their tax bill.

However, if the loss of income appears to be permanent (i.e., the loss of a business, the decision to retire, inability to work due to poor health, or it is likely that the taxpayer will be long-term unemployed), it may be a good time to look closer at the OIC option.  

Next steps

Taxpayers who owe the IRS and cannot pay should always consider the OIC program an option. The first step is to see if you qualify. The IRS offers the “OIC Pre-qualifier tool” on its website, but a closer examination of the facts and financials should focus on two important calculations: the qualification calculation AND the amount that would be needed to settle the debt (the offer amount). This helps avoid the mistake of qualifying for an OIC but not being able to pay the settlement. If this occurs, the taxpayer will be left looking for another solution.

Taxpayers should get all of their IRS and financial information in order. This includes information such as the amount of their debt, the collection statutes, their compliance status, and other relevant information for the OIC application and calculations. They will also have to review their assets, liabilities, income, and expenses to determine the amount they can pay the IRS in the future and their offer amount to settle. Calculations around determining OIC qualification and offer amounts can get complicated. They involve IRS financial analysis rules, including what assets are included/excluded, and what the allowable average expenses for the taxpayer are. IRS Form 656-B, the Offer in Compromise booklet, and the Internal Revenue Manual section 5.8.5 offer help to the taxpayer with the computations and considerations.

There may be another non-IRS option that can be used to resolve past tax debts: bankruptcy. If the taxpayer is in financial distress, they may want to consider whether bankruptcy is an alternative. Taxpayers should always consult a bankruptcy attorney who is knowledgeable in determining how taxes are discharged in various bankruptcy options.

Do you have additional questions?

For assistance creating a strategy to address your tax issue, visit Jackson Hewitt’s Tax Resolution Hub to see the various ways we can help you.

About the Author

Jim Buttonow, CPA, CITP, is the Senior Vice President for Post-Filing Tax Services at Jackson Hewitt. He’s been a leader in helping taxpayers and tax professionals resolve tax problems with the IRS, where he had worked for 19 years in various compliance-enforcement positions. Prior to his current role, Jim’s consulting practice focused on the areas of tax controversy and tax administration, which included leading product development on tax problem software for tax professionals, testifying before Congress, advocating for IRS transparency and efficiency, and proposing innovative large-scale solutions for taxpayers and tax professionals. Jim is also the author of Tax Problems and Solutions Handbook, a publication aimed at helping tax pros work more effectively in post-filing matters and resolving their clients’ most common tax problems.

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