Offers in compromise and the consideration of dissipated assets.

• Author: Molgora, Andres

Since 2008, with the decline in the U.S. economy, the IRS has seen an increase in requests for offers in compromise from financially strapped taxpayers. An offer in compromise (OIC) Is a form of administrative relief offered to financially distressed taxpayers with outstanding tax liabilities who are unable to satisfy their obligations to the government. Taxpayers who can demonstrate an inability to pay their tax liabilities in full may qualify for an OIC, which will settle the outstanding taxes for a fraction of the original amount owed. While an OIC may seem like a dream come true, the reality is that most taxpayers do not meet the requirements to qualify. Out of approximately 57,000 OICs received by the IRS in 2010, roughly 14,000 were accepted (IRS Publication 55B, Internal Revenue Service Data Book, 2010, Table 16). This item addresses the rules and requirements for an OIC, focusing on the importance of maintaining a strict accounting of one's assets.

Qualifying for an Offer in Compromise

Under Sec. 7122(a), taxpayers may request a compromise with the IRS to settle outstanding tax liabilities for less than the full amount owed. To qualify for an OIC, taxpayers must prove that the out-Standing tax liabilities exceed the amount of income and assets available to satisfy such liability during the time remaining in the collection period (i.e., statute of limitation). This is known as establishing the taxpayer's reasonable collection potential (RCP), which is how the IRS measures a taxpayer's ability to pay and includes the value that can be realized from the taxpayer's assets.

The IRS may accept an OIC under one of three bases:

* There is doubt that the taxpayer will be able to satisfy the full amount of the tax liability within the statutory collection period;

* There is doubt about the accuracy of the assessed tax liability; or

* The taxpayer demonstrates exceptional circumstances such that collecting the full tax liability would create economic hardship or would be unfair and inequitable.

OICs are administrative "safety valves" that release the economic pressure of burdensome tax liabilities on financially distressed taxpayers. They are typically encouraged when it is in the best interests of both the taxpayer and the government to promote equity and voluntary compliance with the tax laws.

Reasonable Collection Potential and Dissipated Assets

Notwithstanding the IRS's willingness to cooperate with legitimately afflicted taxpayers, it...