No one wants to pay their debt in full. That’s why chapter 7 bankruptcy is a popular solution when all assets can be protected and the petitioner qualifies with low income; the petitioner erases all their general unsecured debt (like credit cards), keeps their property, and gets a fresh start at minimal expense. However, taxpayers who don’t qualify for bankruptcy have few tax resolution options with the IRS. In general, they can get non-collectible status if they have minimal income and assets, pay the amount owed over time through an installment agreement, or settle their tax debt for less than the amount owed through an offer in compromise (OIC). Out of the 3, an offer in compromise is a popular choice since everyone likes to pay less than the amount owed, but not everyone qualifies for an offer in compromise.
An offer in compromise can be filed by a tax attorney in 3 instances: there is doubt as to collectibility, doubt as to liability, or an OIC would promote effective tax administration. The majority of offers in compromise are made on the basis of doubt as to collectibility as these taxpayers have insufficient income and assets to repay the full tax deficiency. However, even when the taxpayer has sufficient assets and income to repay the full tax deficiency, the IRS may accept an offer in compromise in the interest of effective tax administration when collecting the full amount owed would cause the taxpayer economic hardship or acceptance of the offer would serve public policy or equity considerations.
Tax Public Policy & Equity
The IRS may accept an offer in compromise when doing so promotes effective tax administration as a compromise of the liability serves compelling public policy or equity considerations. This acceptance out of “fairness” basis for an offer in compromise is designed to prevent undermining public confidence that tax laws are being applied fairly and equitably. To illustrate a situation in which acceptance of an OIC would be equitable, assume that a taxpayer relied and acted on erroneous IRS advice that resulted in a tax liability. If the taxpayer has a history of tax compliance in filing and payment, the IRS may accept a compromise of the tax liability as doing so promotes effective tax administration in the interests of equity; after all, the taxpayer only incurred the tax liability due to IRS advice, and collection of the full liability would undermine public confidence in IRS advice and fairness in tax collection. Similarly, if the taxpayer were in a coma for several years and thus failed to file tax returns, and the IRS filed substituted returns and assessed a tax deficiency, the taxpayer may have a basis for filing an offer in compromise on the basis of effective tax administration when they awake from the coma.
Nearly everyone filing an offer in compromise has some degree of economic hardship; after all, they’re asking the IRS to settle their tax bill for pennies on the dollar. However, the economic hardship required by Treasury Regulations for an offer in compromise based upon the effective administration of taxes are generally found in (but not limited to) 3 instances:
(A) Taxpayer is incapable of earning a living because of a long term illnes, medical condition, or disability, and it is reasonably foreseeable that taxpayer’s financial resources will be exhausted providing for care and support during the course of the condition;
(B) Although taxpayer has certain monthly income, that income is exhausted each month in providing for the care of dependents with no other means of support; and
(C) Although taxpayer has certain assets, the taxpayer is unable to borrow against the equity in those assets and liquidation of those assets to pay outstanding tax liabilities would render the taxpayer unable to meet basic living expenses.”26 CFR § 301.7122-1 – Compromises
Those instances are not the only cases in which an offer in compromise can be submitted due to economic hardship, but they illustrate the common theme that the taxpayer’s income and assets are only sufficient to provide for the necessary living expenses of themselves or dependents with no other means of support.
–By Jin Kim. The Law Office of Jin Kim helps clients resolve tax debt with the IRS and the State of California. The Sacramento law firm represents clients in offers in compromise, installment agreements, non-collectible status applications, and audit defense. To learn more about Sacramento tax attorney Jin Kim call her office at
(916) 299-9913 for a free consultation Monday through Friday from 8 AM to 5 PM.