An Offer-in-Compromise (OIC) can be a lifeline for taxpayers with overwhelming tax debt. It lets individuals settle their tax liabilities for less than what they owe, but only if they meet specific criteria. This isn’t a free pass. The IRS closely reviews each application, considering your ability to pay, income, expenses, and assets. There are three main types of OICs: Doubt as to Collectibility, Doubt as to Liability, and Effective Tax Administration. Each one applies to different situations. Knowing which one fits your case can help improve your chances of approval.
1. Doubt as to Collectibility (DATC)
This is the most common type of OIC. It applies when you can’t afford to pay the total tax debt. The IRS looks at your income, assets, and allowable expenses to see if you can’t pay the total amount. You must provide detailed financial documents like bank statements and pay stubs to qualify. If the IRS determines that you won’t be able to pay off the debt within the remaining collection period (usually ten years), they may accept your offer for a lower amount.
Given your current financial situation, your offer must be the most the IRS could reasonably expect to collect from you.
2. Doubt as to Liability (DATL)
This type of OIC applies when you disagree with the tax debt or believe it’s incorrect. You might submit a DATL offer if you think there was a mistake in the audit process or if you have new evidence that reduces your liability.
To succeed with this offer, you’ll need robust documentation showing why the IRS’s assessment is wrong or why the amount should be lower.
3. Effective Tax Administration (ETA)
An Effective Tax Administration offer is used when paying the full tax would cause serious hardship. This type of offer is rare. It’s for people who can technically pay the debt, but doing so would leave them unable to meet basic living expenses. For example, an ETA offer might apply if you liquidated a brokerage or IRA account due to fraud and now face high taxes on top of the loss. Even though the debt is valid, the IRS may accept less if collecting the total amount would cause undue financial strain.
Conclusion
Choosing the right Offer-in-Compromise is crucial to improving your chances of acceptance. The OIC process offers a possible solution, whether you’re facing financial difficulties, disputing the tax, or dealing with hardship. Be sure to meet the eligibility requirements and provide the necessary documentation to back your case.
