Reduce IRS Debt With an Offer in Compromise

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Staff Writer - Angela
October 29, 2018

Offer in compromise is an agreement with the IRS to allow an individual to settle tax debt for less than the full amount he or she owes. To qualify for an offer in compromise (OIC), you must generally demonstrate you are unable to pay the amount due and meet other requirements.

Offer in Compromise Eligibility

If the IRS determines you can afford to pay the tax liability, either as a lump sum or through an installment agreement, you are unlikely to be approved for an OIC. Even if you are able to prove you can’t pay your tax debt, you must meet these requirements to qualify:

  • All tax returns have been filed.
  • All estimated tax payments for the current year have been completed.
  • All required quarterly federal tax deposits have been completed (business owners only).

An OIC may be available in situations in which:

  • Doubt exists as to the correct tax amount for which you are liable (this is rare).
  • The IRS is unlikely to be able to collect the full amount of the debt based on your existing assets and liabilities.
  • Requiring full payment of the liability would create an economic hardship or be inequitable or unfair because of certain special circumstances.

The decision to accept a taxpayer’s OIC is fully at the discretion of the IRS and is not governed by an existing legal right. However, the agency is legally required to give each offer fair consideration. According to data from Nolo, the IRS accepts about 40% of OICs in a given year. Before submitting an offer, you can use the prequalification tool the IRS provides.

Keep in mind, however, that prequalification is no guarantee that your OIC will ultimately be accepted. You may want to consult a tax attorney to increase your likelihood of having your offer accepted. If you apply and are rejected, the detailed financial information you provide will be used to expedite collections activity.

Amount of an Offer in Compromise

When considering an offer in compromise, the IRS will consider your reasonable collection potential (RCP). This accounts for the value of any assets you own, including vehicles, real estate, bank and investment accounts, and other property. It also calculates your anticipated future income less projected allowable living expenses. Offers that are lower than your analyzed RCP will not be accepted by the IRS.

Requesting an Offer in Compromise

If you are requesting an OIC because you are unable to pay or because doing so would cause undue hardship, you must complete and submit both IRS Form 656, Offer in Compromise, and Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals. If you own a business, you must also submit Form 433-B, Collection Information Statement for Businesses.

These documents required detailed financial information the IRS will use to determine whether to accept your OIC. You may also need to provide information about your spouse’s financial situation, even if he or she is not responsible for the tax liability in question. This is common if you live in a community property state.

Make sure to provide comprehensive and accurate information on your Form 433. The IRS pays close attention to the figures you provide; it is much more difficult to get approved for an OIC than it is for an installment payment plan.

With these forms, you must submit the stated application fee (currently $186). This should not be combined with other tax payments. You do not have to pay the fee if you qualify for the low-income exception. This means your monthly income is at or below 250% of the federal poverty amount for your county established by the Department of Health and Human Services.

If you are requesting an OIC to dispute the tax liability, you must submit Form 656-L, Offer in Compromise (Doubt as to Liability). This form does not require an application fee. This avenue is difficult to prove and rarely used.

The IRS may not continue collection activity for the tax liability in question while your OIC is under review. During this period, the agency will likely request additional documentation, including but not limited to pay stubs, vehicle registrations, bank records, and much more.

If your offer is rejected and you choose to appeal, you can do so through the IRS Office of Appeals within 30 days of receiving the rejection. Collection activity will not be resumed until after the appeal process.

Your offer will be returned by the IRS if:

  • Required information is missing.
  • You have subsequently filed for bankruptcy.
  • You did not include a nonrefundable payment for a portion of the debt.
  • You did not include the application fee or combined it with other payments.
  • You are not up to date on current tax liabilities.
  • You have not filed all required tax returns.

If your offer is returned, you may resubmit it once the issue is resolved.

Offer in Compromise Payment Options

Your OIC can be in the form of either a lump sum payment or installments. The first option, known by the IRS as a lump sum cash offer, must be completely paid within less than five months in no more than five installments. If you choose this option, your Form 656 must be submitted with a payment of at least 20% of the amount of your offer. This payment will be applied to your tax debt even if your OIC is rejected. However, you can specify the exact liability to which it will be applied.

You can also make an installment offer, known as a periodic payment offer, which consists of at least six monthly payments completely paid off within two years of the offer acceptance. With this option, your offer must include the first proposed payment amount, which will be applied to your tax debt and is not refundable.

 

 

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