Offer In Compromise: The IRS Tax Debt Compromise Program
An IRS offer in compromise (OIC) can help people with big tax debts pay less than they owe. You suggest a payment amount that you can handle, and the IRS then can accept or reject your offer. However, an OIC isn’t for everyone. Among other things, the application process is long and involves sharing a lot of your financial information.
Key Takeaways
- The IRS offer in compromise (OIC) program lets you settle your tax debt for less than the full amount you owe. You suggest the amount to pay, and the IRS then can accept or reject your offer.
- To qualify for an OIC, you must be current with tax filings, not be in bankruptcy, have received a bill for at least one tax debt included on your offer, and make all required estimated tax payments for the current year.
- There's a non-refundable application fee of $205 for an OIC, but it's waived for certain people with low incomes.
- You can pay the IRS with a lump sum or through periodic payments, but an initial payment is typically required when you submit your application.
Are you struggling to pay your federal income taxes? If so, don’t panic – the IRS has a potential lifeline that could provide some relief. It's called an "offer in compromise" (OIC), and it allows you to pay less than the full amount you owe. This tax debt compromise program might be for you if you can’t pay the taxes you owe, or if paying the full amount will create a financial hardship.
There are companies that will help you apply for an OIC, but you can certainly do it yourself. But if you’re thinking about applying, you probably have a lot of questions. To help you figure out if an OIC is right for you, or if you want to pay someone to handle the application for you, here are answers to some frequently asked questions about the IRS’s OIC program. They should give you a good overview of OICs and the application process.
What is an IRS offer in compromise?
An OIC is an option for people faced with a considerable tax debt. You propose a payment amount to the IRS that you can reasonably afford based on your assets, income, expenses, and future earning potential.
If the IRS agrees that you can't pay the full amount without creating a financial hardship, it may accept your proposition, allowing you to settle your tax debt for less than the full amount and move forward.
Who qualifies for an offer in compromise?
Not everyone is eligible for an OIC. Generally, to be considered for an OIC, you must:
- file all tax returns you are legally required to file
- not be in an open bankruptcy proceeding
- have received a bill for at least one tax debt included on your offer
- make all required estimated tax payments for the current year
Business owners with employees must also be up to date with their federal tax deposits for the current quarter and the two preceding quarters.
If you’re applying for an OIC for the current tax year, you must also have a valid tax filing extension for the current year return.
If you’re not eligible for an OIC, but apply for one anyway, the IRS will:
- return your application and the related fee
- apply any payment you included to your tax debt
How do you apply for an offer in compromise?
For most people, you must complete and submit IRS Forms 656 and 433-A to apply for an OIC. (Businesses must file Form 433-B instead of Form 433-A). These forms require detailed information about your employment status (including self-employment), assets, household income and expenses, and other financial matters.
You’ll also have to calculate your minimum offer amount, select a payment option (lump-sum or periodic payments), and a reason why you’re requesting the OIC.
Documentation to backup your claims, a non-refundable application fee, and an initial payment are required, too.
Also be warned that submitting false information is considered fraud. So, if you lie on your OIC application, you could be subject to civil or criminal penalties.
How much should you offer to pay with an offer in compromise?
Your offer amount generally must be equal to or greater than the minimum amount calculated on Form 433-A. If special circumstances prevent you from paying that amount, determine the amount you can pay and explain your special circumstances on Form 656.
If the IRS doesn’t think you’ve offered enough, and you don’t have any special circumstances, the tax agency will generally give you an opportunity to increase your offer. If you don’t up your offer, the IRS will reject your OIC application.
TurboTax Tip:
The IRS has a handy online tool – the Offer in Compromise Pre-Qualifier – that helps you determine if you meet the basic requirements for an OIC and provides suggested payment amounts based on the financial information you submit. While not required, the tool can help you decide if opening an OIC application is worth the effort.
What’s the fee for submitting an offer in compromise?
The OIC application fee is $205. However, the fee is waived if you meet the low-income certification requirements.
What are the offer-in-compromise payment options?
You can choose to pay your offer amount with either a lump-sum payment or a series of periodic payments.
With the lump-sum option, you must make an initial payment with your application, and then pay the remaining amount in no more than five additional payments. You’ll have up to five months after your OIC is accepted to pay the full amount.
If you select the periodic payment method, you have to make an initial payment with your offer, and then must pay the remaining balance in monthly payments within six to 24 months according to your proposed offer terms.
Initial payments aren’t required if you satisfy the low-income certification requirements. In addition, if you choose the periodic payment option, you normally must continue to make monthly payments while the IRS is evaluating your OIC application. However, this requirement is also waived if you qualify for low-income certification.
How much should you send for your initial OIC payment?
The amount of your initial OIC payment to be sent with your OIC application depends on the payment option you choose. If you select the lump-sum payment option, send 20% of the offer amount as your initial payment. If you go with the periodic payment option, send the first month's payment with your application.
You don’t need to send an initial payment if you satisfy the low-income certification requirements, regardless of the payment option selected.
Do you qualify for low-income certification of your offer in compromise?
Whether you qualify for low-income certification of your OIC application depends on your income, family size, and state of residence.
More specifically, you qualify if your adjusted gross income as shown on by your most recent federal income tax return, or your household’s gross monthly income from Form 433-A multiplied by 12, is equal to or less than an amount from a chart on Form 656 that’s based on your family size and where you live.
Again, if you qualify for low-income certification you don’t have to pay the application fee or make an initial payment with your OIC application. Also, if you select the periodic payment method, you don’t need to make monthly payments while the IRS is evaluating your application.
What if you think your tax debt is wrong?
There’s a different OIC application process if you genuinely disagree with the existence or amount of your tax liability. It’s known as a “doubt of liability” OIC.
With a doubt of liability OIC, you must file Form 656-L instead of Form 656. You’ll also have to provide a written statement explaining why all or part of your tax liability is incorrect. In addition, along with supporting documentation or evidence.
No application fee or initial payment is required, but you must make an offer of at least $1.
You can’t be considered for a doubt of liability OIC if your tax liability has been established by a final court decision or judgment.
What happens while the IRS evaluates your offer in compromise?
It can take the IRS up to two years to investigate your OIC claim. But what happens in the meantime?
According to the IRS, the following will (or can) happen as the tax agency evaluates your OIC application:
- Your OIC-related payments and fees are applied to your tax debt (you may designate payments to a specific tax year and tax debt).
- Interest will be added on the amount of tax you owe (until the offer is accepted).
- The IRS may file a Notice of Federal Tax Lien.
- The IRS will suspend other collection activities.
- Your legal assessment and collection period is extended.
- You don't have to make payments on an existing installment agreement.
If the IRS can’t process your offer, it will send your OIC package (including the application fee) back to you with a letter explaining the reason. If it can process your offer, it will send you a letter with the estimated date of contact. The IRS might also ask you to send additional information.
Your offer is automatically accepted if the IRS doesn't make a determination within two years of receiving your application (not including any appeal period).
How does the IRS decide whether to accept an offer in compromise?
The IRS generally approves OICs when the amount offered represents the most the tax agency can expect to collect within a reasonable period of time. When the IRS calculates this amount, it will look at your income, expenses, asset equity, and ability to pay.
Ultimately, the IRS can accept an OIC based on one of the following reasons:
Doubt regarding your liability. An OIC will be accepted for this reason when there's a genuine legal dispute concerning the existence or amount of your tax liability (Form 656-L must be submitted in this situation).
Doubt regarding collectibility of your debt. The IRS can approve an OIC if doubt as to the collectibility of your tax debt exists because your assets and income are less than the full amount of what you owe.
Effective tax administration. This reason applies when there’s no doubt that you legally owe tax and the full amount can be collected, but requiring payment in full would either create a financial hardship or be unfair and inequitable because of exceptional circumstances.
What happens if the IRS accepts your offer in compromise?
If your OIC is accepted, you must pay the offered amount and follow all the other terms of the agreement. This includes filing your future tax returns and paying any taxes due on time for the next five years. You will also waive your right to contest the amount of tax you owe in court or otherwise.
In addition, the terms of your OIC can’t be extended or changed once the IRS accepts it. However, the IRS can grant a one-time extension for an OIC payment within a two-year period.
If you don’t comply with all the terms and conditions of your OIC (e.g., you don’t pay what you offered), the IRS can terminate the agreement. If that happens, the IRS can collect the tax originally owed (less payments made), plus interest and penalties.
Also note that the IRS is required to make certain information from accepted offers available for public inspection and review for one year after the date of acceptance. This includes information such as your name, city, state, zip code, liability amount, and offer terms.
What happens if the IRS rejects your offer in compromise?
If your OIC is rejected, you have 30 days to request an appeal. You can request an appeal by filing Form 13711 or separate letter with the following information:
- your name, address, Tax Identification Number (e.g., Social Security number) and daytime telephone number
- a statement that you want to appeal the IRS rejection to the IRS Independent Office of Appeals
- a copy of your rejected offer letter
- tax period(s) or year(s) involved
- a list of the specific items you don't agree with and a statement of why you don't agree with each item
- any additional information you want the appeals office to consider
- the facts supporting your position on any issue that you don’t agree with
- the law or authority, if any, on which you are relying
- your signature on the written protest, stating that under penalties of perjury, it is true, correct and complete
Mail Form 13711 or your letter to the office that sent you the rejection letter.
Your application can also be returned, without it being rejected. This might happen if you're not eligible for an OIC (such as when you’re in bankruptcy). However, if you think the IRS shouldn’t have returned your application, you can request a reconsideration by calling the number on your return letter and providing your objections within 30 days. If the IRS agrees to reconsider your offer, it can be submitted again.
What are the downsides of an offer in compromise?
Before you decide to move forward with an OIC application, make sure you understand the potential downsides of making an offer. Here are a few things to consider:
Non-refundable payments. When you apply for an OIC, you generally must submit an initial payment along with your application. This payment is non-refundable and will be applied toward your tax debt even if your OIC is rejected.
Financial disclosures. An OIC application requires full financial disclosure, including detailed information about your income, debts, expenses, assets, and bank accounts. This level of scrutiny into your finances can be uncomfortable and requires complete accuracy and honesty.
Lengthy process. Obtaining an OIC can be time-consuming. From gathering detailed documentation to waiting for an IRS decision, the process can take several months or even up to two years.
Potential for increased debt. While the IRS evaluates your offer, interest and penalties on your outstanding tax debt continue to grow. If your OIC is rejected, your total debt could be higher than when you started the process.
Public record. Accepted offers in compromise are a matter of public record. The IRS maintains a public inspection file containing information about certain offers for one year.
Future tax compliance. As part of the OIC agreement, you must comply with all federal tax filing and payment requirements for the next five years. Failure to comply can result in the reinstatement of your original tax debt, minus any payments already made.
If you’re not sure if an OIC is right for you, consult with a tax professional who can help you understand the implications of making an offer.
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