When the IRS May Settle Even If You Can Pay

Five Real Examples of “Effective Tax Administration” Offers

Most people believe the IRS will only settle your tax debt if you cannot pay anything at all.

Realistically, if you cannot pay anything, this is not an actual path to settlement. There is a resolution available, but not a final settlement.

On the other hand, in some cases, the IRS may accept a settlement even when you “technically” can pay the full amount. These situations fall under a lesser-known category called an Effective Tax Administration Offer in Compromise (OIC-ETA).

A Quick Question for You

Has the IRS determined that you can pay your tax debt in full? Even if doing so would create serious hardship because of your age, health, or other unusual circumstances?

If so, your situation might still be eligible for a settlement that most tax professionals overlook.

What Is an “Effective Tax Administration” Offer in Compromise?

An Offer in Compromise for Effective Tax Administration (or “OIC-ETA”) is a lesser-known type of IRS settlement. The OIC-ETA could allow you to resolve a tax debt for a reduced amount owed. This is even when you technically can pay in full.

This settlement option exists if paying your full IRS tax debt would create serious hardship or would be unfair under exceptional circumstances.

There is a tax law that authorizes and guides these “offer” settlements, specifically Treasury Regulation § 301.7122-1(b)(3) and the IRS’s procedural Internal Revenue Manual § 5.8.11.

The Three Types of IRS Offers in Compromise

When the IRS looks at a settlement offer, it basically considers three possible options:

1. Doubt as to Collectibility (“OIC-DATC”)

This is the most common type of Offer in Compromise. It applies when the IRS believes you cannot realistically pay your full tax debt.

In those cases, the IRS calculates something called Reasonable Collection Potential (RCP). If your assets and future income cannot cover the full balance due, the IRS may accept a reduced settlement.

2. Doubt as to Liability (“OIC-DTL”)

This type of offer applies when you dispute whether any or all tax is actually owed.

Examples of the OIC-DTL may include:

• incorrect IRS assessments
• corrected or previously missing records 
• audit errors

In these situations, the issue is whether your tax liability itself is correct and whether it should be adjusted to a lesser amount.

3. Effective Tax Administration (“OIC-ETA”)

The third category allows the IRS to compromise a tax debt even when you technically can fully pay the tax debt.

Note: This category of settlement Offer applies only in limited and unusual circumstances.

OIC-ETA is not just a claim that paying taxes is difficult. It applies where the IRS may be able to collect in theory, but full collection would create an unfair result under your actual circumstances.

Effective Tax Administration Offers Are Rare. Here’s Why.

Effective Tax Administration Offers are real, but they are not commonly accepted.

The IRS treats them as narrow exceptions, not a standard OIC settlement program. That is because the taxpayer usually has at least some ability to pay, and the facts just don’t always fit. 

The IRS must therefore compare fairness to you against the bigger goal of encouraging taxpayers to fully (and timely) pay their taxes.

But also, most tax professionals do not fully understand the special requirements. And so there are fewer of these offers submitted.

The Two Categories of “ETA”

OIC-ETA offers generally fall into two categories:

Economic Hardship

This applies when, if the IRS forced you to pay the full tax due, it would leave you unable to meet your reasonable basic living expenses, or would create serious financial instability.

Factors the IRS may consider include:

• Advanced age
• Medical conditions
• Reduced earning capacity
• Retirement needs
• Ongoing medical costs

Public Policy or Equity

The second category involves situations where strict collection would undermine confidence that the tax system is being administered fairly and “equitably”.

Just as commented above, these cases are rare and typically involve exceptional circumstances. But they do exist.

An Important Limit on ETA Offers

Even when hardship or fairness are a real concern, the IRS cannot approve an ETA compromise if doing so would undermine the public’s voluntary compliance with the tax laws.

Note: The government does not want people to believe they can ignore their tax obligations, and later receive favorable treatment and “deals”.

For that reason, ETA compromise offers are usually limited to situations where:

• The facts are truly unusual
• The hardship was not simply self-created
• Approving the compromise would not appear to reward intentional noncompliance

Documentation and careful presentation of the facts often become critical in these cases.

IRS Offer in Compromise Hardship, IRS Tax Attorney (Naperville, IL)

Five Situations Where ETA Offers May Apply

Although ETA cases are relatively uncommon, they tend to occur in a handful of recurring patterns.

Example 1 – Limitation of Income Due to Age or Health

Usually, the IRS calculates a taxpayer’s ability to pay based on years of projected future income.

But if you are elderly, dealing with significant health issues, or performing physically demanding work, those projections may not reflect your financial reality.

Example 2 – Catastrophic Medical Expenses

Some taxpayers technically have the ability to pay their tax debt, but only if they use money needed for major medical care (such as cancer treatment, dialysis, assisted living, etc).

Example 3 – Forced Liquidation of Retirement Assets

The IRS may expect taxpayers to use retirement savings to pay tax debt.

But forcing you to liquidate those assets may create long-term financial instability if you are in or near retirement.

Example 4 – Forced Sale of a Home

The IRS looks to home equity as a source of payment. That is often a taxpayer’s largest asset.

However, forcing a person to sell their home may create serious hardship in certain situations, particularly for elderly or disabled taxpayers.

Example 5 – Public Policy or Equity Considerations

A small number of ETA cases involve unusual fairness concerns where strict enforcement would produce an inequitable result.

Why Many Tax Professionals Miss ETA Offers

Most Offer in Compromise evaluations focus only on two questions:

• Can the taxpayer pay the debt?
• Is the tax liability correct?

ETA introduces a third question:

Would collecting the full tax debt create serious hardship or an unfair result under exceptional circumstances?

These cases are often missed not only because the facts are unusual. But also, these cases must be well-argued and documented carefully under the OIC-ETA rules.

Could Effective Tax Administration Apply to You?

If the IRS believes you can pay your tax debt in full, but some of the following factors apply to your situation, the Effective Tax Administration rules may deserve closer review.

• Are you older or facing health conditions that limit your ability to keep earning income?
• Would paying the tax debt require selling your home or withdrawing retirement savings?
• Do significant medical expenses affect your financial ability to pay your monthly bills?
• Would full payment of the tax create an unfair result under an unusual circumstance?

When It May Be Worth Reviewing Your Situation

If you owe a significant tax debt and the IRS believes you can pay in full, that should not always end the analysis.

In some cases, the IRS collection formula may not fully account for a taxpayer’s age, health concerns, retirement needs, or other unusual circumstances.

A careful review can help determine whether the case belongs in a standard Offer in Compromise analysis or whether the Effective Tax Administration rules should also be considered.

You can request a strategy session here:

https://www.stopirsproblem.com/strategy-sessions

Attorney Insight

In my 30 years of experience, these cases are also overlooked because the IRS’s financial calculations seem to control the discussion. However, the real-life facts may tell a different story. Those details matter. Those details can create the opportunity to settle. 

– J. Anton Collins, Tax Attorney (Former IRS), Tax Law Offices, Inc.

FAQs

Q: What is an Effective Tax Administration Offer in Compromise?

An Effective Tax Administration Offer in Compromise (or “OIC-ETA”) is another IRS settlement option that allows you to resolve your tax debt for less than the full balance due. This option is available, even when you technically can pay 100% of the debt. This type of offer applies when collecting the full amount would create serious hardship or would be unfair, and would require there to be very special circumstances.

Q: Will the IRS really settle tax debt if I can afford to pay it?

In some situations, yes. Most Offer-in-Compromise settlements are based on the inability to pay. Under the Effective Tax Administration rules, however, the IRS may accept a reduced amount if full collection would create serious financial hardship or lead to an unfair, “inequitable” result. These cases must be based upon very special circumstances, and are fairly uncommon (but they do occur).

Q: What situations qualify for an Effective Tax Administration Offer?

There is no set list of circumstances that qualify for OIC-ETA. However, offers typically involve unusual circumstances, such as advanced age, serious health conditions, significant medical expenses, unusual dependent-related facts, or situations where paying the tax debt might require selling a home or exhausting retirement savings. The IRS looks for facts that show full collection would create hardship or an inequitable result.

Q: Are Effective Tax Administration Offers difficult to get approved?

Yes. An ETA Offer-in-Compromise is more difficult to obtain than the more common Doubt as to Collectibility (“OIC-DATC”) offers. The IRS reviews these cases closely and requires strong documentation showing that the situation is truly exceptional. IRS more strictly applies its discretion in approving these cases, so that the compromise would not “undermine compliance” with the tax laws.

Q: What is the difference between an ETA Offer and a regular Offer in Compromise?

A regular Offer in Compromise (OIC-DATC) is usually based on whether you can fully pay the debt based on your net income and net assets. An ETA Offer applies when the IRS may be able to collect (in theory), but practically, doing so would create serious hardship or an unfair result under your very special circumstances. The IRS has full discretion over whether to accept those offers.

Q: Does age or health really affect an IRS settlement?

Age could affect the IRS settlement offer. Age, health, and even a dependent’s health might be important if they affect your ability to continue earning income or maintaining your financial stability with reasonable monthly expenses. In some cases, the IRS may consider whether its collection procedures and assumptions are realistic and reasonable, given your circumstances.

Q: Should I get a second opinion if I was told I don’t qualify for an Offer in Compromise?

If you were told that Offer-in-Compromise was not available to you, but that the tax professional did not fully consider your facts, then a second opinion could be wise. Most Offer in Compromise evaluations focus only on whether the taxpayer can pay the full amount. However, a less common category of Offers, deemed for “Effective Tax Administration”, focuses on whether the IRS should collect the full amount. If your situation involves age, health concerns (whether yours or a dependent’s), or other unusual circumstances, it may be worth reviewing whether the Effective Tax Administration rules apply.