Offer in Compromise

An Offer in Compromise (OIC) is a program that allows taxpayers to settle their tax debt for less than the full amount they owe. It is an available option when a taxpayer cannot pay their tax liability in full or doing so would create a financial hardship. The IRS considers an individual’s ability to pay, income, expenses, and asset equity to determine if they will accept the offer. This program is essential for providing relief to those who are struggling with tax obligations and ensures that taxpayers have an opportunity to settle their debts without facing undue financial strain.

Eligibility Criteria

To qualify for an Offer in Compromise, the IRS considers various factors, including:

  1. Ability to Pay: The IRS assesses your financial situation including all assets, monthly income, and living expenses to determine if you are able to pay the full tax debt.

  2. Income: Your current and future income is also considered to evaluate your ability to settle the debt.

  3. Expenses: Necessary living expenses are taken into account to ensure you can meet basic living standards.

  4. Asset Equity: The equity in your assets, including property and vehicles, is evaluated.

Before proposing an OIC, the taxpayer must have filed all necessary tax returns and made any required estimated payments. Any other payment plans with the IRS must also be up to date.

Application Process

The process of applying for an Offer in Compromise involves several steps:

  1. Pre-Qualification: The IRS provides an online tool that helps determine if you are eligible for an OIC. This tool considers factors such as income, expenses, and asset equity.

  2. Form Submission: The main form to submit for an OIC is Form 656, along with Form 433-A (for individuals) or Form 433-B (for businesses). Both forms require detailed financial information.

  3. Application Fee and Initial Payment: There is a non-refundable application fee ($205 as of 2023), and an initial payment must be made unless you qualify for a waiver due to low income.

  4. Review and Negotiation: Once the forms are submitted, the IRS reviews the application. They may request additional information and negotiate the offer terms.

  5. Acceptance and Compliance: If the offer is accepted, you must comply with all the agreed terms including making the agreed payments and staying compliant with tax obligations for a period typically five years.

Types of Offers

There are three types of offers that the IRS might accept under the OIC program:

  1. Doubt as to Liability: This is when there is a genuine dispute about the amount of tax debt or whether the taxpayer actually owes the debt.

  2. Doubt as to Collectibility: This is when the taxpayer’s assets and income are insufficient to pay the full tax debt.

  3. Effective Tax Administration: This is when the taxpayer can pay the full amount, but doing so would create an economic hardship or would be unfair and inequitable.

Payment Options

When proposing an Offer in Compromise, taxpayers have two payment options:

  1. Lump Sum Cash Offer: This requires an initial payment of 20% of the total offer amount, with the balance to be paid in five or fewer installments after the offer is accepted.

  2. Periodic Payment Offer: This involves making monthly payments while the offer is being considered, with the balance to be paid within 24 months.

Benefits and Drawbacks

Benefits

  1. Relief from Tax Debt: Provides a way to settle the tax debt for less than the full amount owed.

  2. Avoidable Financial Hardship: Helps taxpayers who cannot afford to pay the full debt without causing financial instability.

  3. Fresh Start: Allows taxpayers to resolve their tax issues and get a fresh start with the IRS.

Drawbacks

  1. Strict Criteria: The IRS has stringent eligibility criteria, and not all requests are accepted.

  2. Long Process: The application and review process can be lengthy, often taking several months to years.

  3. Non-refundable Payments: The application fee and initial payments are non-refundable, even if the offer is rejected.

Practical Considerations

  1. Detailed Financial Disclosure: Be prepared to disclose all financial information comprehensively; incomplete or incorrect forms can lead to delays or rejection.

  2. Professional Guidance: Given the complexity, it is recommended to consult with a tax professional or attorney to determine eligibility and assist with the application.

  3. Stay Compliant: Ensure you remain compliant with all tax filings and payments during the application process and afterward if the offer is accepted.

Conclusion

An Offer in Compromise is a viable option for taxpayers facing significant financial challenges with their tax obligations. By negotiating with the IRS, eligible individuals can settle their tax debt for less than what they owe, allowing them to alleviate financial burdens and work towards financial stability. However, given the strict criteria and detailed process, it’s crucial to approach this option with professional advice and thorough preparation.

For more information on the Offer in Compromise program, you can visit the official IRS page: IRS Offer in Compromise.