The IRS recently released their annual offer in compromise (OIC) data for 2016. Although the acceptance rate fell in fiscal year 2014 and 2015, it reached a new all-time high in 2016 with an acceptance rate of 42.86%. That is almost 1% more than the previous all-time high reached in fiscal year 2013.
An Offer in Compromise is a “proposal by a taxpayer to the Federal government that would settle a tax liability for payment of less than the full amount owed.” The IRS will not approve an OIC if it believes that the balance can be paid in full or through a payment arrangement.
The IRS Fresh Start Initiative (FSI) in 2011 made it easier to qualify for an OIC. The FSI brought changes to the IRS OIC program. Arguably, these changes are a major reason why more OICs are being accepted recently.
It is important to note that the number of OICs submitted decreased by 4,000, the number of OICs accepted did not change—why the the acceptance rate reached a new all-time high.
Offer in Compromise Modifications
The changes the IRS made affected how the IRS calculates the RCP or reasonable collection potential of a taxpayer. Specifically, when considering a Lump Sum OIC, the IRS will only consider one year of future income. Moreover, with a Short-Term Periodic OIC, the IRS only considers 2 years of future income versus five in the past.
Total Dollar Amount of Offers in Compromise Hit an 8 Year High
The total dollar amount of offers accepted reached an 8 year high to $225,946 (in thousands). This represents a 10.35% increase in the dollar amount of OICs in FY 2016 compared to FY 2015. The total dollar amount of offers accepted represents what taxpayers paid the IRS to settle their overall tax liability.
When considering an Offer in Compromise with the IRS or even with some states, it is always a good idea to work with a licensed tax professional.
Sources: IRS Data Books 1999-2016