Legal Definitions - offer in compromise

An offer in compromise is a way to settle a tax debt with the IRS for a reduced amount. It is not a guaranteed option and the IRS has the discretion to accept or deny an offer. The IRS considers the potential value of a taxpayer's assets, income, and other factors to determine if an offer is reasonable.

An offer in compromise can be made based on one of the following premises:

• Doubt as to liability: When a taxpayer disputes the amount or existence of the tax debt.
• Doubt as to collectibility: When a taxpayer disputes the ability to pay the tax debt in full due to insufficient assets or income.
• Effective tax administration: When a taxpayer has enough assets to pay the tax debt but believes that full payment would be unfair or create an economic hardship.

For example, if a taxpayer owes $10,000 in taxes but can only afford to pay $5,000, they may submit an offer in compromise to the IRS. The IRS will review the taxpayer's financial situation and determine if the offer is reasonable based on their guidelines. If the offer is accepted, the taxpayer will pay the reduced amount and the remaining debt will be forgiven.