Offer in Compromise
What's an IRS Offer in Compromise?The IRS Offer in Compromise (OIC) is a government tax debt resolution program that allows delinquent taxpayers to settle their tax liabilities for less than the full amount owed. If you don't have the ability to pay your total tax debt within the IRS' Collection Statute (CSED), if paying the tax debt will cause you to suffer a financial hardship, or if you don't believe you owe the tax debt, you may qualify for the OIC.
Right now is an optimal time to submit an OIC to the IRS. Through the Service's Fresh Start program, the OIC has been redesigned to be more taxpayer-friendly experience. The end result is a better process that will guide you toward the acceptance of your Offer. That is, if you qualify.
What Are the Reasons the IRS Will Consider an OIC?The IRS will accept an OIC based on three main criteria: Doubt as to Collectibility, Doubt as to Liability and Effective Tax Administration. Below is a brief description of each.
- Doubt as to Collectibility – If you believe you do not have the ability to pay your tax debt, this is your OIC type. Doubt as to Collectibility is the reason most OICs are submitted. See IRS form 656-B, Offer in Compromise Booklet for more information.
- Doubt as to Liability – If you believe you do not owe a portion of the tax debt or the total tax debt, the IRS will consider your OIC. Use IRS form 656-L, Offer in Compromise Doubt as to Liability.
- Effective Tax Administration – An offer may be accepted based on effective tax administration when there is no doubt that the liabilities have been correctly determined and no doubt that the full amount owed can be collected, but requiring payment in full would either create an economic hardship or would be unfair and inequitable because of exceptional circumstances.
How Do I Know If I Am Eligible For The OIC?A common stumbling block on the road to OIC acceptance is tax compliance. T be eligible for the OIC, you must file all of your necessary tax returns and make all of your current tax payments. For most individuals, this means filing missing, personal 1040 income tax returns and making all current 1040ES payments. For most businesses with employees, this means filing all 941 and 940 returns, along with all income tax returns timely, and making current employment tax deposits on time and in full for two consecutive quarters.
You are NOT eligible for the OIC if you are -
- Not in current tax compliance,
- In an open audit,
- Currently in bankruptcy,
- Waiting on an open Innocent Spouse Claim
Is There an Easy Way to Determine If the OIC Is Right for Me?Yes. Contact Us. We'll take about 10 minutes to find out if the Offer in Compromise is an option to consider.
Option B isn't quite as thorough as talking to a Fresh Start Enrolled Agent, but it could get you headed in the right direction. Go to the IRS' OIC prequalification website. This is a decent place to start if you're trying to decide which IRS tax debt resolution best fits your circumstances. You may also watch the IRS' OIC video, which may also point you in the right direction.
How Does The IRS Determine Whether or Not to Accept an OIC?When an OIC is submitted to the IRS under Doubt as to Collectability, the Service will consider income, expenses and asset equity (and other financial factors), in order to determine your Reasonable Collection Potential (RCP)*. Next, the Service compares your RCP to your total tax liability. If your RCP is less than your total tax liability, the IRS will accept an Offer for the amount of your RCP. If not, you're out of luck.
*(RCP is your ability to make a monthly payment multiplied by 12 – 24 months, plus the liquidation value of your equity in assets. Of course, it's not quite this simple, but you get the idea.)
How Do I Submit My OIC to the IRS?Not to worry, the process isn't difficult. Use IRS form 656 and the 656 Booklet as your OIC guides, and follow the instructions carefully. Keep in mind that there is a non-refundable $186 Application Fee to submit your Offer. (See page 2 of form 656 to determine whether or not you meet the Services' Low Income Certification guidelines. If you do you may forego the Application Fee.)
Your form 656 must be submitted with your completed form(s) 433-A OIC. If you are submitting an OIC for a business, use form 433-B OIC. Note that both forms require backup documents. The address to submit your OIC is included in the IRS 656 Booklet.
Remember to double check your OIC documents before you submit them to the IRS. Be sure to cross your Ts, dot your Is, and above all else, be forthcoming. The IRS, after all, is an agent of the Federal government, with gives it ample scope and power to launch an in-depth investigation of your case, if the OIC you submit warrants a closer look.
It's always best to complete all IRS forms included with your OIC to the best of your knowledge and ability. Integrity is key. Remember, you will be signing them under penalties of perjury!
How Do I Determine How Much to Offer the IRS?Complete form 433-A OIC (433-B OIC for a business) and use it to calculate your minimum Offer amount, which must be greater than zero. Then you're ready to complete form 656. Almost everything you need is located in the Offer in Compromise 656 Booklet.
Do I Need to Send My Total Offer Amount to the IRS with My OIC form?No. You have two basic choices to pay your Offer amount, Lump Sum Cash and Periodic Payments. Here are the differences:
- Lump Sum Cash – requires 20% of your total Offer amount to be paid with your submitted OIC and the remaining balance to be paid in five or fewer payments within 5 months of your OIC acceptance date.
- Periodic Payment – requires 24 monthly payments starting while your OIC is under review with your first payment paid with your submitted OIC. Failure to make the monthly payments will cause your OIC to be rejected. Use IRS form 656 PPV to make monthly payments toward your OIC during the review process.
What If My Offer Is Accepted?First, give yourself a firm handshake. You did it! Now simply pay your Offer amount in the agreed on the agreed upon dates. Be sure to meet your Offer Acceptance terms. Remember, your next income tax refund may be taken and applied to the tax balance.
Once the IRS accepts your offer, it is expected that you will have no further delinquencies and will fully comply with the tax laws. If you don't abide by all the terms and conditions of the OIC, the IRS may determine that your OIC is in default. To avoid this, you must timely file all tax returns and timely pay all taxes for 5 years or until the offered amount is paid in full, whichever period is longer. When an OIC is declared to be in default, the agreement is no longer in effect ,and the IRS may then collect the amounts originally owed, plus interest and penalties.
What If My Offer Is Rejected?If the IRS rejects an OIC, then the taxpayer will be notified by mail. The letter will explain the reason that the IRS rejected the offer, and will provide detailed instructions on how the taxpayer may appeal the decision to the IRS Office of Appeals. The appeal must be made within 30 days from the date of the letter.
You may Appeal the denial of your OIC by submitting form 13711 within 30 days of your rejection letter. You may also request these other resolutions.
How Long Will It Take the IRS to Accept or Reject My Offer?OIC investigation should be completed within 6 months. A letter of acceptance, a letter of rejection, or a letter asking for additional information will be sent by IRS during that time frame. If OIC is not rejected within 24 months, you may consider your OIC accepted.
What If I Can't Afford the Fee to Submit My Offer or to Make the Monthly Payments?If you meet the IRS' Low Income Certification, you will not be required to pay the $186 Application fee, or make payments while your OIC is under review. See the IRS 656 Booklet for more information. In addition, you may qualify for help from a Low Income Taxpayer Clinic in your area. You can find more information at irs.gov.
What Else Do I Need to Know About the IRS OIC?If you submit an OIC, it will delay the IRS' Collection Statute (CSED). Ordinarily, the statutory time within which the IRS may engage in collection activities is suspended during the period that the OIC is under consideration and is further suspended if the OIC is rejected by the IRS and the taxpayer appeals the rejection to the IRS Office of Appeals within 30 days from the date of the notice.
Taxpayers may submit and the IRS can consider an Offer to compromise taxes due on tax returns that have been filed but not yet assessed, as long as the taxes are assessed by the time the OIC is accepted.
You may designate the OIC payments you make while your OIC is under review to specific tax years or tax portions. If you default your accepted OIC, however, the IRS may collect the total amount owed with penalties and interest. And though a Notice of Federal Tax Lien may be filed, the IRS will not pursue other collection activities while your Offer is being considered.