The Three Types of Offer in Compromise

There are three types of Offer in Compromise with the IRS and I wanted to go over those real briefly here today. The three types of Offer in Compromise are the most common that we think about when we think about making a deal to settle for less with the IRS. That’s called a doubt as to collectability offer.

A doubt as to collectability offer is the type of offer that you make when everybody agrees that there’s no way you’re ever going to pay your tax bill. There’s no way you could ever afford to do so.

Very quickly, I’ll go over the calculation. The calculation determined the amount of your offer in a doubt as to collectability offer is monthly disposable income times 12 plus assets equals the amount of your offer.

Let’s put some numbers to that so that it makes more sense. If your monthly disposable income was $50 and you multiply that by 12, that’s $600, and let’s assume that you have zero assets. That means that you could make an offer that’s likely to be accepted from the government for $600.

The second kind of offer in compromise is something that’s more uncommon. It’s called doubt as to liability. A doubt as to liability offer is very rare. It’s the type of offer that you make when there’s some good faith bonafide argument that you may not be responsible for the tax debt. Now, the thing to know about a doubt as to liability offer is that if you’ve had a notice of deficiency sent to your home or to your last known address, your last filing address, then your doubt as to liability chances are very, very low.

The government will not even entertain your doubt as to liability offer because you’ve been deemed to have had an opportunity to dispute that case in the tax court when they issued you a notice of deficiency. If you don’t understand what I’m talking about, don’t worry. It’s very unlikely this would apply to you.

Now, the third type of offer is actually called effective tax administration, or ETA. Effective tax administration is the type of offer when everybody agrees that theoretically you have the ability to pay, but it would still be very unfair in order to force you to pay.

Let me give you the classic example. The classic example is a retiree, say over age 65, who has equity in a home but doesn’t have anything else with which to pay the tax debt. Let’s say they owe $100,000 and they have $150,000 equity on their home. This is an effective tax administration type of situation where you may be able to get away with making a very low dollar amount.

You can kind of pick the amount, anywhere from $250 to $1000, but you can pick the amount, and hopefully the government will basically take pity on you and accept your offer. They’re very rare. They’re limited to the circumstances that I just described, but I wanted you to be aware of the fact that those are out there.