What does "Offer in Compromise" Mean?

An offer in compromise (OIC) is one of the debt settlement options offered by the Internal Revenue Service (IRS). This option allows a person to make a request for a reduced tax bill. After reviewing the offer, the IRS may accept it, propose different terms, or reject it. Rejections are common because the IRS often concludes that it is possible to collect more than is offered by the debtor.

The IRS commonly tries to accommodate individuals with overdue tax bills. An offer in compromise is a settlement option that allows a person to request that the IRS lower her debt. The IRS may wholly reject an OIC. This commonly happens because the amount that a person proposes is below her reasonable collection potential (RCP). The RCP is the amount that the IRS believes that it can collect currently, over time, or in the future.

If a person’s offer is rejected, she may request another OIC for a different amount. There are no specified limits to the number of requests that can be made. It is possible that the IRS may agree that an OIC is best, but it may not agree on the terms proposed by an individual. In this instance, an IRS representative may propose new terms. When the IRS does accept an offer in compromise, the acceptance is based on one of three grounds.

The first ground for acceptance is doubt of collectability. This refers to a situation where the IRS does not predict that there is a realistic possibility of collecting the full amount due. The second ground for an OIC acceptance is doubt of liability. This refers to instances where there are questions or debates of whether the tax bill on file with the IRS is correct.

The third reason that the IRS may accept reduced settlement is for effective tax administration. This refers to a category of circumstances where individuals can show that paying the full amount would result in unfairness or undue hardship. For example, a person may have a significant amount of financial resources, but he may not be able to pay his tax bill because he is undergoing life-saving medical treatment and has no health insurance.

It should be noted that an offer in compromise is not the IRS’ preferred debt settlement option. Individuals are often encouraged to consider other options, such as payment plans. The agency also warns that taxpayers should beware of promoters’ claims that tax debts can be settled through the OIC program for so-called pennies on the dollar.