If you're still butting heads with the IRS over a prior-year tax return, there's a potential way to end the matter once and for all. Strategy: Make the IRS an offer it can't refuse. The IRS has set up a special "offer in compromise" (OIC) program for this purpose. While the IRS is often willing to go along with a deal, it won't waver on the procedures. The rules are clearly spelled out at www.irs. gov/Individuals/Offer-in-Compromise-1. Here's the whole story: An OIC is an agreement between a taxpayer and the IRS settling the taxpayer's tax liability for less than the full amount owed. If the liability can be fully paid through an installment agreement or other means, the taxpayer generally isn't eligible for an OIC.
To qualify, the taxpayer must have filed all tax returns, made all required estimated tax payments for the current year and deposited payroll taxes for the current quarter if he or she is a business owner. Generally, the IRS won't accept an OIC unless the amount offered by the taxpayer is equal to or greater than the "reasonable collection potential." That includes the value that may be realized from the taxpayer's assets (real estate, automobiles, bank accounts and other property) as well as anticipated future income (less certain amounts for basic living expenses). The IRS may accept an OIC based on three grounds: 1. Doubt as to liability. This requires a genuine dispute as to the existence or amount of the correct tax debt under the law. 2. Doubt that the amount owed is fully collectible. Such doubt exists where the taxpayer's assets and income are less than the full amount of the tax liability. 3. Effective tax administration. This occurs when there's no doubt that the tax is legally owed and that the full amount owed may be collected, but requiring payment in full would create an economic hardship or be "unfair and inequitable" under the circumstances. If the IRS accepts the taxpayer's offer, it expects the taxpayer will have no further delinquencies and will fully comply with the tax laws. If the taxpayer doesn't abide by all the terms and conditions of the OIC, the IRS may determine the OIC is in default. If the IRS rejects an OIC, the taxpayer will be notified by mail. Tip: The letter will include reasons for the rejection and detailed appeal instructions.