The IRS Offer in Compromise (OIC) program is commonly associated with taxpayers who owe tax debt, but have insufficient assets or resources to pay it off. The IRS will agree to settle the tax debt for less—sometimes significantly less—than the amount owed if the taxpayer agrees to pay as much as the IRS can realistically collect.
However, the OIC is also available for businesses, including businesses that are currently operating. This includes tax debt attributable to back payroll taxes.
First, the business must be current in filing all tax returns. The IRS will not even consider OICs from taxpayers that have not filed all required tax returns. They will return your OIC, and keep any money you sent as an initial deposit to be applied towards your outstanding tax debt.
The IRS will also not consider an OIC if there are trust fund taxes which need to be personally assessed against responsible persons. These include Social Security taxes, Medicare taxes, and taxes withheld from employee’s paychecks that have not been remitted to the IRS. An IRS Revenue Officer must make a determination regarding the assessment of the Trust Fund Recovery Penalty against all responsible persons before considering the OIC.
To make a decision regarding whether to accept an OIC, and what amount to accept in the offer, the IRS will look at the company’s equity in assets, liabilities, and income. However, there are important nuances to these asset valuations that could substantially impact how the IRS views your offer.
For example, income-producing assets may be excluded from the business’s asset calculation in some cases. If a business has $100,000 equity in an asset that produces a net income of $5,000 a month, then the income will be counted in the taxpayer’s reasonable collection potential, but the equity in the asset would not.
Accounts receivable may also be removed from the reasonable collection potential calculation in some cases. You can sometimes argue that the accounts receivable is necessary for the production of income, or that accounts that are over 90 days delinquent should be valued at a discount.
The valuation of business assets can be complicated when submitting an OIC, and the overall process of a business OIC is generally much more difficult than an OIC for an individual taxpayer. However, the benefits can be worth the trouble, so consider talking about a business OIC with your tax attorney if your business owes significant back taxes.