A compromise offer (OIC) is an agreement between a taxpayer and the IRS to settle a tax debt for less than the total amount owed. It can generally be an option for taxpayers who can't fully pay their tax debt, or if doing so would create financial difficulties. This is just one of many procedural changes instituted by the IRS to help struggling taxpayers during this unusual period in our nation's history. Another recent change, which will survive the pandemic, improves the “start from scratch” option offered by our Offer in Compromise (OIC) program.
An OCI allows taxpayers to settle their tax debt for less than the total amount they owe. It may be a legitimate option for taxpayers who can't fully pay their tax obligations or if doing so creates financial difficulties. The IRS has the authority to cancel all or part of your tax debt and reach an agreement with you for less than you owe. This is called a compromise offer or OCI.
Keep in mind that the IRS will only consider you for tax debt relief if you are in good standing with the agency. Too many taxpayers avoid contacting the IRS or tax professionals for help because they know they are in a bad position. If the IRS determines that you cannot pay any of your tax debts due to financial difficulties, the IRS may temporarily delay the collection by stating that your account is currently not collectible until your financial situation improves. This deadline is called the collection law expiration date and usually elapses 10 years after the IRS charges (or “evaluates”) your taxes.
From there, you'll likely fill out an IRS debt forgiveness form that describes your financial situation. If the IRS accepts the taxpayer's offer, the taxpayer will have agreed to fully comply with tax laws. The IRS can also seize your property (including your car, boat, or real estate) and sell it to satisfy the tax debt. This is because the IRS determined that those families did not need to pay taxes because of their financial situation.
If you qualify, your tax advisor can determine how much your offer amount should be and deal with the IRS to get you to apply for an OIC. When the IRS terminates an OIC, the agreement is no longer in effect and the IRS can collect the amounts originally owed (minus payments made), plus interest and penalties. It's best for most people to apply for other IRS options, such as IRS payment plans or the “currently uncollectible” state, where your allowable expenses exceed your monthly income. However, the IRS works with taxpayers on an individual basis, so the burden of one person's tax debt could be completely forgiven, while another person could be asked to pay their debt in full.
If there were a Debt Forgiveness Act that IRS agents could follow, it would be much easier to answer this question. If you can no longer afford a heavy tax burden, the IRS can offer you different ways to move forward. The fiscal impact of debt forgiveness or cancellation depends on your individual facts and circumstances.