One of three types of Offer in Compromises (OIC) that we will discuss in the coming weeks is what is known as an ETA (Effective Tax Administration) OIC. Like I have stated many times before on this blog, getting an OIC is the most popular request from clients and looks the most attractive to U.S. taxpayers. When trying to apply for an ETA OIC there are 3 conditions that must exist for you to be a candidate:
- You agree that you genuinely owe the tax debt.
- The tax liability equals, or is less than, the taxpayer's reasonable collection potential (RCP) which is: Net equity, plus future income potential.
- Exceptional circumstances exist, such as the collection of the tax would create an economic hardship, or there is compelling public policy or equity considerations that provide sufficient basis for compromise.
Let’s break this down a little more. When applying for ETA OIC, you have to fully agree you owe the tax debt. I typically deal with clients who don’t believe they owe as much as the IRS says and want an offer because of this. The risk you run when submitting this type of offer is: If your offer is declined, you have accepted that you owe every penny of the assessed tax debt. The second part of this OIC is that you must actually have the capability to pay the tax debt via equity in your home, or liquidating a 401K or IRA plan. This is unusual when dealing with the IRS because typically the IRS is going to want to collect on your tax debt in full if you have the capability. The biggest factor in submitting for an ETA officer is the exceptional circumstances; typically these offers are reserved for people that when collecting on the debt, the IRS would create a Public Relations nightmare to be dealt with.
As an example: A 75 year old couple owes $150,000 in tax debt, the couple has assets that could fully pay the debt via equity on a home, but borrowing against the home would put the couple at risk of losing their home. In this situation the IRS would consider selling to keep from forcing grandma/grandpa out into the streets and would avoid a public relations nightmare that would otherwise be created! A very small amount of these offers are accepted, and only Enrolled Agents or someone with a deep knowledge of the IRM is going to be able to help get yours approved!