Offer in Compromise: How to Settle Your IRS Debt

When unable to pay back tax debt due to hardship, an Offer in Compromise (OIC) will allow you to minimize debt such that it does not harm your perspective.

The Offer in Compromise also known as OIC

An IRS Offer In Compromise allows you to settle your past tax debt for less than the full amount you owe and may be the right IRS tax resolution for your needs.

iffer in compromise
calculate Offer in compromise infographic

The first step is to determine if they apply, and if they do, they must calculate the sum they must pay to settle the tax bill.

By reviewing all of the options in relation to their individual situations, an experienced tax professional will help taxpayers avoid pitfalls, set up the best collection option with the IRS, and eventually save them a lot of grief and money.

Offer in Compromise

An IRS Offer in Compromise (OIC) is a proposal for paying tax debt based on the amount calculated as the reasonable collection potential or RCP

A settlement allows you to settle your tax debt for less than the full amount you owe.

It may be a legitimate option if you can't pay your full tax liability, or doing so creates a financial hardship.

The IRS considers your unique set of facts and circumstances:

  • Ability to pay;
  • Income;
  • Expenses; and
  • Asset equity.

The IRS generally approves an offer  when the amount offered represents the most we can expect to collect within a reasonable period of time.

How to File an Offer In Compromise

The Offer in Compromise is a long and comprehensive plan.

This involves disclosing to the IRS every aspect of your finances. Therefore, it is best to make sure you are a successful choice before applying for the program.

An unsuccessful OIC will only expand the statues on your debt collections.

It also gives the IRS any bit of information they need to implement against you collections.

If your OIC is rejected by the IRS, they now know more about your financial situation; including where your money comes from, where your bank accounts are and what you own.

If your OIC is refused and the IRS wants to levy you, they know exactly where to go.

Offer in Compromise

Estimated Time to Complete 360 minutes

Application Fee USD 205

Things Needed ?

- Financial Records
- Specific Instructions for Form 433A-OIC and 656

Recommended tools:

- A Computer.
- Internet connection.
- Pdf program

Steps to Submit Offer In Compromise

Make Sure You Are Eligible

The IRS will return any newly filed Offer in Compromise (OIC) application if you have not filed all required tax returns and have not made any required estimated payments.

Any application fee included with the OIC will also be returned.

Any initial payment required with the returned application will be applied to reduce your balance due.

This policy does not apply to current year tax returns if there is a valid extension on file.

You are not eligible if you are in an open bankruptcy proceeding.

Use the Pre-Qualifier Tool to confirm your eligibility and prepare a preliminary proposal.

Submit your offer

You'll find step-by-step instructions and all the forms for submitting an offer in the Offer in Compromise Booklet, Form 656-B PDF.  Your completed offer package will include:

  • Form 433-A (OIC) (individuals) or 433-B (OIC) (businesses) and all required documentation as specified on the forms;
  • Form 656(s) - individual and business tax debt (Corporation/ LLC/ Partnership) must be submitted on separate Form 656;
  • $205 application fee (non-refundable); and
  • Initial payment (non-refundable) for each Form 656.
Offer In Compromise
Select a payment option

Your initial payment will vary based on your offer and the payment option you choose:

  • Lump Sum Cash: Submit an initial payment of 20 percent of the total offer amount with your application. If your offer is accepted, you will receive written confirmation. Any remaining balance due on the offer is paid in five or fewer payments.
  • Periodic Payment: Submit your initial payment with your application. Continue to pay the remaining balance in monthly installments while the IRS considers your offer. If accepted, continue to pay monthly until it is paid in full.

If you meet the Low Income Certification guidelines, you do not have to send the application fee or the initial payment and you will not need to make monthly installments during the evaluation of your offer. See your application package for details.

Understand the process

While your offer is being evaluated:

  • Your non-refundable payments and fees will be applied to the tax liability (you may designate payments to a specific tax year and tax debt);
  • A Notice of Federal Tax Lien may be filed;
  • Other collection activities are suspended;
  • The legal assessment and collection period is extended;
  • Make all required payments associated with your offer;
  • You are not required to make payments on an existing installment agreement; and
  • Your offer is automatically accepted if the I
If your offer is accepted
  • You must meet all the Offer Terms listed in Section 7 of Form 656, including filing all required tax returns and making all payments;
  • Any refunds due within the calendar year in which your offer is accepted will be applied to your tax debt;
  • Federal tax liens are not released until your offer terms are satisfied; and
  • Certain offer information is available for public review by requesting a copy of a public inspection file.
If your offer is rejected

TheCPATaxProblemSolver has the skills and experience to determine whether an Offer in Compromise is the program for you. Retaining our tax professionals guarantees you peace of mind. You can rest assured:

  • Settle your tax bill for LESS than the IRS claims you owe! We know all updated OIC administrative procedures and tax laws.
  • We have considerable weapons including Special Circumstance Cases and Appeals.
  • We know that a prepared and calculated approach is the only way to maintain our excellent track record of consistent OIC acceptance.
  • If you qualify for the Offer in Compromise program, you can save thousands of dollars in taxes, penalties and interest. Taxpayers can negotiate settlements on all types of taxes including most payroll taxes, penalties and interest.
  • The OIC program provides taxpayers who owe the IRS more than they could ever afford to pay, the opportunity to pay a smaller amount as a full and final payment.
  • A Doubt as to Collectibility (DATC) Offer in Compromise is negotiated on the basis of a taxpayer’s inability to pay and takes into account the taxpayer’s current financial position including the taxpayer’s equity in assets.
  • The OIC program also allows taxpayers that do not agree that they owe the tax or feel that the tax has been incorrectly calculated, an opportunity to file an Offer in Compromise-Doubt as to Liability (DATL) and have their tax liabilities reconsidered.

 

Offer In Compromise

Offer in Compromise Requires

When applying for Offer in Compromise with the IRS, there are many issues to consider. First, the IRS wants all of the tax returns to be legal. Your annual tax payments must also be valid. That means you will file your last six annual income tax returns.

  • If you are a wage earner, you must be withholding enough tax from your paychecks to result in a tax return with no balances due.
  • If you're self-employed, your projected tax payments have to be valid. Those are quarterly due.

Keep in mind that one mistake may result in your OFFER IN COMPROMISE being returned with no right of appeal.

Another incredibly important aspect is to recognize that you need to remain completely compliant for the next five years if your Offer in Compromise is accepted. People who get accepted often lose their settlement by failing to file on time future tax returns or by filing a return with a due new balance. If the offer fails, all tax liabilities return with additional penalties and interest. Besides, none of the money paid to settle is refundable. Before applying for the offer it is important to have a plan to remain compliant.

OIC- Types of Services

There are also various types of Offer in Compromise programs prior to filing your application. The most popular OFFER IN COMPROMISE is a "Collectability Doubt" order.

In short, this means that the settlement that you are proposing is for the largest sum of money that the IRS might reasonably expect to collect from you over the life of the debt, typically ten years.

The IRS takes into account your present net income, your asset collateral, and your expected future earnings. So they make a decision to embrace this kind of OIC.

The other programs which are less common are Doubts About Liability and Effective Tax Administration.

If you apply for one of these programs, you request that the IRS ignore your financial conditions.

Instead, you want them to take extraordinary circumstances into account to rule on settling your debt.

In such cases, the IRS considers reasons why you may not owe the debt or why your debt should be settled otherwise, for health reasons , for example.

Understanding Full Financial Disclosure in the OIC

You are expected to submit a full financial statement when making an Offer in Compromise. That means you have to tell the IRS TODAY about your financial situation.
The IRS analyses your revenue, expenditure , assets and any resources you need to decide how much realistically they would expect to get. When considering which expenses are allowed the IRS follows strict standards.
So it is very important to consider all your choices before you agree to pursue an OFFER IN COMPROMISE.
Make sure you can afford to pay the discounted fee before sending an IRS Offer in Compromise.
You have two options for repayment with an OFFER IN COMPROMISE-lump sum and periodic payment. After five months of approval, the IRS requires you to be able to pay off a lump sum Offer in Compromise and a Time Payment Plan is split into 24 equivalent monthly installments beginning when you submit the OIC application.
Holding these payments OFFER IN COMPROMISE is key to OIC 's success. Defaulting on an arrangement would invalidate the whole OIC, ensuring that you will be responsible for the initial amount of tax liability plus fines and interest again.
This also makes it difficult to apply again for a tax debt settlement program, as the IRS would require a clear reason for the default. It is very important to be fully aware of what you do when you submit an Offer in Compromise.

Submitting an Offer in Compromise

To make an Offer in Compromise needs comprehensive paperwork to be done, including full financial disclosure, which can be both cumbersome and time consuming for many. It is best to consult a tax advisor while considering an Offer in Compromise.

A licensed tax professional will advise you on the probability that your offer will be accepted and discuss the terms and conditions of the agreement, depending on your particular situation.

Note, only if the IRS decides that the reduced sum is the best they would expect to get unless you have exceptional circumstances, can the tax debt decrease. 

Professional tax debt reduction assistance will help you discover all the choices available for having the most tax debt reduction.

Given that tax debt management involves negotiation with the IRS, knowledge of tax law and the applicable tax code is essential.

It is wise to use expert help to reach a smooth and beneficial resolution for tax debt reduction, particularly of a large amount of tax debt.

What if IRS dismisses your OIC?

If the IRS refuses your OFFER IN COMPROMISE, they now know more about your financial situation; namely where your money comes from, where your bank accounts are, and what you own.

If your OIC is refused and the IRS wants to levy you, they know exactly where to go. Offer In Compromise, a carefully and professionally curated offer will give you the best chance to settle for dollar pennies!

UNDERSTANDING  AN OFFER IN COMPROMISE

An OIC is a type of out of court agreement between a taxpayer and the IRS.

OICs are designed to negotiate a resolution to the taxpayer’s liability and place collection efforts on hold.

Do keep in mind that the IRS has the power to compromise or settle federal tax liabilities by accepting less than full payment, provided the taxpayer can provide valid reasons.

Keith
AICPA
BBB Accredited Business Rating
Registered Tax Planner