Offer in Compromise (OIC)
In some situations, the IRS will accept less than the full amount due. Basically, that depends on what IRS considers “reasonable collection potential,” or RCP. IRS Forms 433-A(OIC) or 433-B(OIC) are again used as a basis for that determination, although IRS has certain allowable standards for expenses claimed. IRS will allow what it considers reasonable living expenses or business expenses to offset against the income reported to determine the RCP. It will also take into account any equity is assets owned by the taxpayer. Finally, it will require that the taxpayer be in “current compliance” as far as filing and payment requirements relative to current taxes. ( See IRS Publication 656 at: https://www.irs.gov/pub/irs-pdf/f656b.pdf)
Under some circumstances, taxpayers have certain legal rights if they do not agree with IRS' determinations. One of them is known as “collection due process,” or CDP. After IRS issues a statutory demand for payment (Letter 1058), the taxpayer has a right to appeal IRS' threat to take enforcement action by offering an alternative to enforced collection, such an installment agreement, or an offer in compromise. This is often used when the taxpayer cannot reach agreement with IRS for an installment agreement or the amount of the OIC. The IRS' Appeals office must make an independent determination if the position of IRS' collection office was the right one under the statutes and regulations. If the Settlement Officer in the Appeals office sustains the decision of the collection office, the taxpayer has jurisdiction to seek relief in the U.S. Tax Court.