As there is no right to having one’s debt settled for a lesser amount, discretion in granting or denying an offer in compromise lies with the IRS. The IRS typically will not accept an offer in compromise unless it meets some minimum threshold value. This is known as the reasonable collection potential and includes the potential value of assets derived from the taxpayer’s bank accounts, real property, vehicles, future income, and other assets. Consequently, this relatively uncommon method of settling debt is primarily available to those who are undergoing serious financial hardship.
An offer the IRS may accept must also be made based on one of the following premises:
- Where a taxpayer disputes the amount or existence of the tax debt (doubt as to liability)
- Where a taxpayer disputes the tax debt can be collected in full due to assets owned or income earned falling short (doubt as to collectibility)
- Where a taxpayer has sufficient assets to pay the tax debt but believes that a requirement of full payment would be unfair and inequitable or would create an economic hardship (effective tax administration)
[Last updated in July of 2020 by the Wex Definitions Team]