Dealing with tax debt can be overwhelming, but the IRS provides a potential solution: the Offer in Compromise (OIC). This program allows taxpayers to settle their tax liability for less than the full amount owed, offering financial relief to those struggling with payments. In this guide, we’ll break down how the OIC works, eligibility criteria, application requirements, and expert tips for increasing your chances of acceptance.
What is an Offer in Compromise (OIC)?
An Offer in Compromise is a tax relief program by the IRS designed to help taxpayers who cannot pay their full tax debt without facing significant financial hardship. The IRS considers this option when it determines that collecting the full amount would be unlikely or unreasonable.
The primary goal of the OIC is to facilitate tax resolution while ensuring the government collects as much as possible rather than receiving nothing due to bankruptcy or non-payment.
Who Qualifies for an Offer in Compromise?
To be eligible for an OIC, taxpayers must meet specific requirements:
- Tax Compliance: All required tax returns must be filed.
- No Open Bankruptcy Cases: The IRS will not consider an OIC if the taxpayer is in an active bankruptcy proceeding.
- Up-to-Date Estimated Payments: Individuals must be current with their estimated tax payments for the year, while employers must have made tax deposits for the past two quarters.
Failing to meet these requirements will result in the IRS returning the application without review, though any payments submitted with the offer will be applied to the outstanding tax balance.
Grounds for an Offer in Compromise
The IRS considers three primary justifications for accepting an OIC:
- Doubt as to Liability: The taxpayer believes the IRS has miscalculated the tax owed.
- Doubt as to Collectability: The taxpayer’s income and assets are insufficient to cover the full tax bill.
- Effective Tax Administration: The taxpayer could technically pay the full amount, but doing so would create an unfair economic hardship.
How to Apply for an Offer in Compromise
Filing an OIC requires completing IRS Form 656 and submitting detailed financial documentation. The IRS assesses income, expenses, assets, and liabilities to determine the taxpayer’s ability to pay.
Application Fees & Initial Payments
- $205 Application Fee: This is mandatory unless the taxpayer qualifies for a low-income waiver.
- Initial Payment: The payment structure depends on the type of offer:
- Lump-Sum Offer: Requires 20% of the offer amount upfront, with the balance paid within five months.
- Periodic Payment Offer: Requires the first payment with the application, with the remaining balance paid over 6 to 24 months.
Possible Waivers for Low-Income Taxpayers
Under the Taxpayer First Act, individuals with an Adjusted Gross Income (AGI) below 250% of the poverty level may qualify for an application fee and initial payment waiver.
The IRS Review Process
The IRS evaluates an applicant’s financial information, determining reasonable collection potential by analyzing:
- Assets & Living Expenses: Assets are assessed at quick-sale value, and only essential living expenses are considered.
- Future Income: The IRS projects a taxpayer’s future income based on their financial situation.
- Unemployed Applicants: Taxpayers experiencing unemployment must provide documentation of their status and any benefits received.
Outcomes: Acceptance or Rejection
Accepted Offers
If the IRS accepts the offer, the taxpayer will receive a written confirmation. It’s crucial to adhere to the agreed payment plan and remain compliant with tax obligations for the next five years to prevent default. Once fully paid, the IRS will release any existing tax liens.
Rejected Offers
If an offer is denied, the IRS provides a written rejection notice. Taxpayers have the right to:
- Request a meeting to discuss alternative resolutions.
- File an appeal within 30 days of rejection.
If an OIC is rejected, taxpayers may submit a new offer with another application fee.
Additional Considerations
Tax Liens
The IRS may file a Notice of Federal Tax Lien during the OIC review process. If the offer is accepted, the lien will be released upon full compliance with the agreement.
Payment Plans
Taxpayers unable to qualify for an OIC may explore installment agreements or other IRS hardship programs to manage their tax debt.
Why Work with a Tax Professional?
Filing an OIC is a complex process that requires thorough documentation and adherence to strict guidelines. Tax professionals bring invaluable expertise, helping taxpayers:
- Determine the best type of offer to submit.
- Accurately complete all required forms.
- Navigate IRS negotiations and potential appeals.
- Expedite processing times by avoiding common errors.
At JS Morlu, our team specializes in tax resolution strategies, including OIC submissions. Contact us today for a consultation and let us help you achieve a favorable tax debt settlement.
Final Thoughts
An Offer in Compromise can provide much-needed financial relief, but eligibility and success depend on meeting IRS requirements and submitting a compelling case. Understanding the process, preparing complete financial documentation, and seeking professional guidance can significantly improve the chances of acceptance. If you’re struggling with tax debt, explore whether an OIC is the right solution for you.
