An offer in compromise is not one generic settlement program. Treasury Regulation section 301.7122-1 distinguishes the legal bases on which the IRS may compromise a liability, and each basis requires a different analysis.
Doubt as to liability
Doubt as to liability concerns whether the assessed tax is correct. The focus is the substantive or procedural basis for the assessment, not simply whether the taxpayer can afford to pay. Returns, examination files, substantiation, legal positions, and prior opportunities to dispute the liability can matter.
Doubt as to collectibility
Doubt as to collectibility concerns whether the taxpayer’s assets and income are sufficient to pay the liability. The IRS evaluates financial information under its collection standards and valuation rules. Eligibility, filing compliance, current taxes, asset equity, income, expenses, dissipation issues, and the remaining collection period may affect the analysis.
Effective tax administration
Effective-tax-administration compromises can involve economic hardship or exceptional circumstances even where the liability is legally due and collectible. These are not generalized fairness claims; the regulatory standards and supporting facts must be developed.