An offer in compromise (OIC) is an agreement between a taxpayer and the government that settles a tax liability for payment of less than the full amount owed.
The IRS will accept an offer in compromise when it is unlikely that the tax liability can be collected in full and the amount offered reasonably reflects collection potential.
Doubt as to liability (DATL) comes into play when a taxpayer doesn’t actually owe the tax the IRS claims they do. This isn’t a question of amount or inability to pay the requisite tax, but rather a claim that a certain portion of the tax isn’t owed at all, because doubt as to liability isn’t a question of finances, you won’t need to provide any of your client’s financial information to qualify for the offer.
Doubt as to collectible (DATC) is what most people associate with offer in compromise. This offer comes into play when the taxpayer doesn't dispute that the tax is owed, but has no way of paying the full amount owed. A doubt as to collectible offer will be based on what the IRS calls reasonable collection potential, or RCP. There are three components when calculating reasonable collection potential: equity, income, and allowed expenses.
- At its core, the settlement comes down to an equation:
- Lump Sum Equation (to be paid in 5 months or less)
- Disposable Monthly Income x 12 months + Net Realizable Equity = Settlement Amount
- Periodic Payment Equation (to be paid in between 6 and 24 months)
- Disposable Monthly Income x 24 + Net Realizable Equity = Settlement Amount