When a taxpayer cannot pay their tax bill (now or in the future) with their assets and future monthly income, they may qualify for the IRS’ Offer in Compromise program. The offer in compromise for “doubt as to collectability” allows taxpayers who are not projected to be able to pay the IRS before the IRS’ collection statute expires to settle their tax bill for less than the full amount. This program gets a lot of hype in the press and media, but it is rarely used.
The real cost: the offer amount
Most people believe that the IRS haggles with the taxpayer about how much it will take to settle the tax bill. Some believe that the IRS will just take a percentage of the bill – or that they will waive penalties and interest in a settlement. These are all myths.
If a taxpayer first qualifies for an OIC, they will then determine how much to offer the IRS. The “offer amount” in an OIC is the amount the IRS will reasonably collect from the taxpayer before the statute to collect expires – that is their “reasonable collection potential” (RCP). RCP is a formula of how much the IRS will accept to settle. RCP is equal to the taxpayer’s “net realizable equity in their assets” PLUS a component of their future monthly disposable income, usually 12 or 24 months.