The IRS Offer in Compromise Acceptance Rate In FY 2021 Fell to 30.7%
Although the number of Internal Revenue Service (IRS) offers in compromise (OIC) received increased by 9.98% in 2021, the number of offers approved only increased by 6.06%. Therefore, the IRS OIC acceptance rate for 2021 fell by 1.1% to 30.7% in comparison to 2020. 30.7% represents a differential of 12.1% from the OIC all-time acceptance rate high of 42.8% back in 2016. Moreover, the average amount per offer in compromise accepted increased by 3,520.24 or 31.83%.
What Is an IRS Offer in Compromise?
An offer in compromise is a tax debt settlement option. It allows a taxpayer to settle their tax debt for less than the full amount owed. There are three types of OICs, however, the most popular one is Doubt as to Collectability, as others are rarely pursued nor approved.
- Doubt as to Liability: A tax settlement where the taxpayer disputes the tax assessed.
- Effective Tax Administration: Settlement of an assessed tax liability where the taxpayer and IRS agree that the tax owed is valid, and it can be paid in full. The taxpayer, on the other hand, asks for a settlement for less than the amount owed because collecting the tax would create a financial hardship or public policy/equity concerns dictate that they pay less than what they owe
- Doubt as to Collectability: a tax settlement where the taxpayer’s financial situation does not allow them to pay the balance owed with assets and future income.
The IRS will consider factors such as the ability to pay, income, expenses, and asset equity when evaluating a Doubt as to Liability OIC. Offers are usually not accepted if the taxpayer has the ability to pay the full amount owed. Taxpayers who believe they are unable to pay their full tax liability may submit an offer in compromise as a way to settle their debt.
Why Did the IRS the Offer in Compromise Rate Fall?
There are a few possible explanations for the decrease in the acceptance rate (versus an expected increase during a pandemic). First, the decrease in the IRS OIC acceptance rate is likely due to randomness as 1% is not a statistically significant drop. Second, IRS offer examiners may have disputed the calculation of anticipated "future income" by proposing that wage earners calculate their average income over a longer period of time. In other words, instead of looking just at the last 3 months of income in computing a taxpayer's reasonable collection potential, the IRS would consider a longer period of time because many Americans were only temporarily unemployed or underemployed during the pandemic.
The Average Amount Per Offer in Compromise Accepted Increased
The total amount of offers combined totaled $220.9 million for the fiscal year 2021 vs. $158 million in FY 2020. It's also worth noting that the average dollar amount per offer in compromise accepted increased by 31.83% or $3,520.24. One explanation for why offers accepted were for larger amounts of money could be due to the fact that the economic recovery in much of 2021 helped strengthen the ability of distressed taxpayers to pay. Another factor could be the aggressive inflation and subsequent rise in asset prices leading to taxpayers having to submit higher offer amounts.
Factors to Consider When Making an Offer in Compromise
If you're considering submitting an offer in compromise for IRS tax debt, it's important to do your research and make sure you have a strong case. The process of submitting an offer in compromise is not simple or straightforward. There are a number of forms and documents that need to be filed, and the IRS will require a detailed explanation of your financial situation.
Leverage a Licensed Tax Professional
It is best to work with a qualified tax pro, such as an Enrolled Agent, CPA, or tax attorney to increase your chances of having your offer accepted. To see if you qualify for an offer in compromise or if you are a good candidate, you can perform a search for a local tax EA, CPA, or tax attorney with Offer in Compromise experience on TaxCure.
When it comes to resolving tax debts, there is no one-size-fits-all solution. The best way to find out if an Offer in Compromise is right for you is to consult with a tax professional who can evaluate your specific situation and advise you on the best course of action.
Source: IRS Data Books