What Does the IRS Look at When Evaluating a Business OIC?

The IRS uses a formula called the Reasonable Collection Potential (RCP) to determine the minimum offer it will accept. For businesses, the RCP calculation includes:

• Net realizable value of business assets — This includes equipment, inventory, accounts receivable, real property, and any other assets the business owns, minus any secured liabilities.
• Future income — The IRS projects the business’s future earning capacity and factors in what could reasonably be collected over the remaining statutory collection period.
• Dissipated assets — Any assets the business recently transferred, sold below market value, or otherwise disposed of may be added back into the calculation.

For operating businesses, the IRS will typically want to see recent financial statements, bank statements, accounts receivable aging reports, payroll records, and a clear picture of monthly income and operating expenses. The IRS will not accept an offer that is less than what it believes it can collect through other means — such as levies, liens, or installment agreements. A strong OIC requires thorough financial documentation and a well-prepared case. A solid evaluation of the case and the correct presentation of your OIC will allow you to exempt a portion of the items normally included in the RCP.

Eligibility Requirements

To be eligible to file an OIC, a business must meet the following basic requirements:

• All required tax returns must be filed — the IRS will not consider an OIC if any returns are outstanding.
• All required estimated tax payments for the current year must be made (for applicable business types).
• If the business has employees, all required federal tax deposits must be current.
• The business must not be in an open bankruptcy proceeding.

Failure to meet any of these requirements will result in the IRS returning the offer without consideration.

Types of Tax Debt That Can Be Settled

A business OIC can address a range of federal tax liabilities, including:

• Unpaid income taxes (corporate or pass-through)
• Employer payroll taxes (941 liabilities)
• Excise taxes
• Penalties and interest associated with the above
• Trust Fund Taxes: It is worth noting that Trust Fund Recovery Penalties — assessed personally against business owners or officers who were responsible for collecting and remitting payroll taxes — are treated as individual liabilities. These can be included in a personal OIC filed by the responsible party, separate from any business OIC.

Payment Options Within an OIC

If the IRS accepts a business’s offer, there are two payment structures available:

• Lump Sum Cash Offer — The full offer amount is paid within five months of acceptance. A 20% non-refundable down payment is required when the offer is submitted.
• Periodic Payment Offer — The offer amount is paid in monthly installments over 24 months. Payments must begin when the offer is submitted and continue throughout the review period.

During the time the OIC is under consideration, collection activity is generally suspended. However, the IRS will continue to apply any tax refunds owed to the business toward the outstanding liability.

What Happens After an OIC Is Accepted?

Acceptance of an OIC comes with ongoing obligations. If the business fails to meet these conditions, the IRS can reinstate the full original liability:

• All future tax returns must be filed on time for five years following acceptance.
• All future taxes must be paid in full and on time during the five-year compliance period.
• The business must not accrue any new federal tax debt during the compliance period.

Is an OIC Right for Your Business?

An Offer in Compromise can be an excellent resolution tool, but it is not the right fit for every situation. Businesses that have significant assets, strong revenue, or the ability to pay through an installment agreement may find that the IRS declines their offer — or that another resolution option is more appropriate.

Alternatives to consider include:

• Installment Agreements — Monthly payment plans that allow the business to pay off the debt over time.
• Currently Not Collectible (CNC) Status — A temporary suspension of collection activity when the business has no ability to pay.
• Penalty Abatement — Reduction or removal of penalties through first-time abatement or reasonable cause arguments.
• Bankruptcy — In some cases, bankruptcy may discharge or restructure certain tax debts, though this is complex and situation-dependent.

San Antonio, Houston and South Texas business owners owing taxes to the IRS can settle their tax liability for less than they owe but navigating an Offer in Compromise for a business requires a thorough understanding of IRS financial analysis standards, IRS perspective, IRS internal – non publicly published procedures, careful preparation of documentation, and strategic positioning of your case. Working with an experienced tax professional can significantly improve your chances of a successful outcome.