The Offer in Compromise (OIC) is a valuable program provided by the Internal Revenue Service (IRS), designed to help taxpayers settle their tax debts for less than the total amount owed. This program is particularly beneficial for individuals facing financial distress who cannot pay their tax liabilities in full. However, the IRS will not accept an offer if the taxpayer can pay their debt through an installment agreement over time.
The OIC program has seen several changes over the years, with one of the most significant updates resulting from the IRS’s “Fresh Start” initiative, which made the terms more flexible and accessible to a broader range of taxpayers. In this blog, we’ll explore the key aspects of the OIC program, including eligibility requirements, application fees, payment options, and other critical factors to consider.
What is an Offer in Compromise (OIC)?
An Offer in Compromise (OIC) allows qualifying taxpayers to settle their tax debts for an amount lower than what they owe. The IRS generally accepts OICs when they believe that paying the full tax liability would create undue financial hardship for the taxpayer. However, an OIC is only considered when there is a valid reason to reduce the amount owed, such as:
- The taxpayer’s inability to pay the full tax debt.
- A legitimate dispute regarding the amount of tax owed.
- Payment in full would lead to economic hardship for the taxpayer.
Let’s break down the specific requirements and options available for those interested in this program.
Payment Options: Lump-Sum Offers vs. Periodic Payment Offers
Taxpayers submitting an OIC are required to make an up-front, non-refundable payment while the IRS reviews the offer. Here are the two primary payment options available:
1. Lump-Sum Offers:
- Taxpayers must pay 20% of the offer amount upfront.
- The remaining balance must be paid within five months after the offer is accepted.
- This option is ideal for individuals who can gather a substantial portion of the debt settlement quickly.
2. Periodic Payment Offers:
- Taxpayers spread out payments over a longer period, typically 6 to 24 months.
- The first payment must be included with the offer, with subsequent payments following the agreed terms.
- This option is suitable for those unable to pay a large lump sum but can manage smaller, periodic payments.
Both payment types require the initial up-front payment, which is applied toward the taxpayer’s liability if the offer is rejected.
Application Fees and Low-Income Taxpayers
The standard application fee for submitting an OIC is $205, but there are exceptions for certain taxpayers:
- Low-Income Taxpayers:
- If your household’s adjusted gross income (AGI) does not exceed 250% of the applicable poverty level, you may qualify for a fee waiver.
- Low-income applicants are also exempt from the up-front payment and monthly installments while their offer is under review.
To determine eligibility, you can refer to the Low-Income Certification chart in Form 656. This provision helps ensure that financially struggling individuals can still apply for relief.
Key OIC Concepts: Understanding the IRS Acceptance Criteria
The IRS bases its decision to accept an OIC on one of three concepts:
1. Doubt as to Liability:
- This applies when there is a legitimate dispute about the existence or amount of tax owed.
- Taxpayers who believe the assessed amount is incorrect can submit an OIC based on doubt as to liability using Form 656-L. Detailed explanations must be provided for consideration.
2. Doubt as to Collectability:
- This applies when the taxpayer’s income and assets are insufficient to cover the full tax debt.
- The IRS evaluates the taxpayer’s reasonable collection potential, considering their income, assets, and living expenses, and may accept an offer based on these limitations.
3. Effective Tax Administration:
- Even if the taxpayer can pay the full tax debt, the IRS may accept an offer if collecting the entire amount would result in economic hardship or if it would be unfair or inequitable.
- This category is less common and requires compelling reasons for acceptance.
OIC Qualification Requirements
To qualify for an OIC, the following criteria must be met:
- All required tax returns must be filed.
- All estimated tax payments for the current year must be made.
- The taxpayer must not be involved in an active bankruptcy proceeding.
- The taxpayer must use the latest version of Form 656 and provide necessary documentation.
Additionally, the IRS offers a helpful Offer in Compromise Pre-Qualifier tool on their website, which allows taxpayers to determine their eligibility and create a preliminary proposal.
Submitting Your OIC: Forms and Documentation
When submitting an OIC, taxpayers must fill out Form 656, along with:
- Form 433-A (for individuals) or Form 433-B (for businesses), which require comprehensive information about the taxpayer’s financial situation, including income, expenses, assets, and liabilities.
- All forms must be completed accurately, with non-applicable items marked as N/A to avoid processing delays.
Incomplete forms or missing documentation are common reasons why an OIC might be rejected.
What Happens If Your OIC Is Rejected?
If the IRS rejects your OIC, they will issue a written notice explaining the reason. Taxpayers have the right to request a meeting to discuss alternative solutions. If no agreement is reached, taxpayers can file a protest with appeals within 30 days.
In the case of a rejected offer, the application fee is not refunded, though you can submit a new offer with a fresh application fee.
Accepted Offers: What to Expect
When an OIC is accepted, the taxpayer must adhere to the agreed payment terms. Once all payments are made, the IRS will release any Notices of Federal Tax Lien. Keep in mind that accepted offers over $50,000 require a written opinion from the IRS Chief Counsel.
Financial Analysis for OIC: How the IRS Evaluates Your Ability to Pay
The IRS uses allowable living expense standards to evaluate a taxpayer’s ability to pay. These standards, which are updated periodically, include:
- National Standards: Cover basic living costs like food, clothing, and other necessities.
- Local Standards: Account for housing, utilities, and transportation expenses.
- Other Necessary Expenses: Include health care, taxes, and court-ordered payments.
These standards help the IRS assess a taxpayer’s true ability to pay and make the OIC process more fair and equitable.
Final Thoughts: How We Can Help You Navigate the OIC Process
The Offer in Compromise program can provide significant financial relief for struggling taxpayers. However, navigating the application process can be complicated, especially with ever-changing IRS requirements.
Our team of tax professionals is here to guide you through each step, ensuring that your OIC application is submitted correctly, and your chances of acceptance are maximized. If you’re considering an OIC, contact our office today for expert advice and assistance.
