I recently represented a woman in her 80s who had been defrauded from most of her life savings. She was forced to liquidate her brokerage and retirement accounts, which created a large tax bill due to income and capital gains. Although she had enough left to pay the taxes, doing so would have left her financially unstable for the rest of her life.
Our only option was an Offer in Compromise (OIC) based on Effective Tax Administration (ETA OIC). A Reasonable Collection Potential (RCP) OIC wasn’t an option because she could technically afford to pay full taxes. After lengthy negotiations, the IRS settled for about half of the taxes owed. The process, however, was far more complicated and subjective than a typical RCP offer. In the end, neither my client nor the IRS was particularly happy, but it was a compromise that allowed her some financial security.
This case highlighted the key differences between an RCP OIC and an ETA OIC—especially during negotiations.
RCP Type OIC (Doubt as to Collectibility)
An RCP-type OIC is for taxpayers who cannot fully pay their tax debt. The IRS calculates its Reasonable Collection Potential (RCP) by looking at income, assets, liabilities, and living expenses. If the taxpayer’s financial situation shows they can’t afford to pay, the IRS may agree to settle for less.
RCP OIC Negotiation:
- Numbers-Driven: The IRS relies on strict calculations to determine how much the taxpayer can afford to pay.
- Little Room for Subjectivity: It’s about the numbers. If the offer matches the taxpayer’s RCP, it’s likely to be accepted.
- Rigid Process: If the IRS determines taxpayers can afford to pay, they likely won’t accept a lower offer.
ETA OIC (Effective Tax Administration)
An ETA OIC is different. It’s for taxpayers who can technically pay their debt but would find it difficult to do so. In my client’s case, paying the full amount would have left her financially vulnerable for the rest of her life.
ETA OIC Negotiation:
- Focus on Hardship: This type of offer considers personal circumstances, such as age, health, and future financial needs.
- More Subjective: I had to argue that even though she could full-pay, it would have been unfair. This type of negotiation requires a narrative backed by facts, showing why paying the debt would be unjust.
- Longer and More Complex: The IRS takes more time to review these cases and has more back-and-forth than RCP offers.
Key Differences in Negotiation
The main difference between an RCP OIC and an ETA OIC is the negotiation focus. With RCP offers, the numbers drive the decision. If taxpayers can’t afford to pay, the IRS will accept less. The process is straightforward and primarily based on financial data.
With an ETA OIC, it’s more about fairness. I needed to show that paying in full would cause undue hardship, even if the taxpayer could technically afford it. These negotiations are more subjective and can be drawn out as both sides work through the details.
In my client’s case, the ETA OIC allowed her to avoid full payment, giving her a chance to live out her final years with some financial peace of mind. While the process was complicated, and neither side was thrilled with the outcome, it was a fair resolution for her situation.
