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Settle Tax Debt With an Offer in Compromise

 

Settle Tax Debt With an Offer in Compromise

Learn About OICs & How They Work

Elizabeth Rosen
by Elizabeth Rosen, Contributor

If you have a large amount of tax debt that you cannot pay in full, you may want to consider an Offer in Compromise (OIC).

With an OIC, a qualified taxpayer can submit an offer to the IRS and request to settle their tax debt for less than the total amount due. But keep in mind, the OIC program is not for everyone and it comes with strict eligibility requirements.

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What Is an Offer in Compromise?

An offer in compromise is defined as “an agreement between you (the taxpayer) and the IRS that settles a debt for less than the full amount owed.” The OIC program provides qualified taxpayers with an opportunity to pay off their tax debt and get a fresh start. Ideally, an offer in compromise serves the interests of the taxpayer as well as the IRS.

The OIC program may be your best option if you cannot pay your full tax liability, or if paying the full amount would cause you financial hardship.

RELATED: IRS Options If You Cannot Pay Your Taxes

OIC Eligibility Requirements

In order to be considered for an OIC, you must make a suitable offer based on your “true ability to pay.” Additionally, you must be up-to-date with all your tax filing and payment requirements. Taxpayers who are involved in an open bankruptcy proceeding do not qualify.

You should be prepared to describe your financial situation in detail on the OIC application. The IRS will evaluate your income, assets, expenses, and future earning potential. Keep in mind that submitting an OIC application does not guarantee the IRS will accept your offer.

The IRS will generally approve an OIC if the amount you offer is the most they can expect to collect within a reasonable timeframe. However, your offer will likely be denied if you’re able to pay your full tax debt through an installment agreement or lump sum.

You can use the IRS’s Offer in Compromise Pre-Qualifier Tool as a guide for determining your eligibility and preparing your proposal.

How to Submit an Offer in Compromise

Your OIC application package must include the following items:

Form 656 (Offer in Compromise)
Form 433-A (OIC) or Form 433-B (OIC) (Collection Information Statement)
• $186 application fee (non-refundable)
• Initial offer payment (non-refundable) for Form 656

If you have both individual and business tax debts, you will need to submit two Forms 656 – one for your individual tax debt and one for your business tax debt. Each Form 656 will require a separate $186 application fee and initial offer payment.

Selecting a Payment Option

You must choose a payment option and include an initial offer payment with your OIC application. The amount of your initial payment (and future payments) will depend on your total offer amount and the payment option you select. There are two payment options:

Lump Sum Cash Payment – This option requires an initial payment of 20% of your total offer amount. If/when your OIC is accepted, you must pay the remaining offer balance in 5 payments (or less) within the next 5 months.

Periodic Payment – This option allows you to pay in monthly installments. You must submit the first installment payment with your OIC application, and continue to pay monthly while the IRS evaluates your offer. If/when your offer is accepted, you must make monthly payments until the balance is fully paid (generally 6 to 24 months).

NOTE: Taxpayers who meet the Low Income Certification guidelines are not required to pay the application fee or send an initial offer payment. They are also exempt from making monthly installment payments while the IRS evaluates their offer.

For more information about OIC applications, see IRS Form 656-B (Offer in Compromise Booklet).

The OIC Process

Once you submit your offer, it will be reviewed by the IRS. However, there is no guaranteed timeframe for an IRS response. In the meantime, if you chose the periodic payment option, you are required to make monthly payments while the IRS considers your offer. If you fail to make those payments, your offer will be returned – and there’s no chance for appeal.

The IRS will continue to charge you penalties and interest during the OIC evaluation process. Additionally, the IRS may file a ‘Notice of Federal Tax Lien’ during the offer investigation. Other collection activities will be suspended while your offer is being considered.

After your offer is submitted, you are expected to properly file and pay your taxes until the IRS makes a final decision. If your offer is accepted, you are also expected to stay up-to-date with all your tax filing and payment responsibilities for the next 5 years. Breaking the terms of your OIC (by not fulfilling your tax obligations) means your offer may be defaulted – and you will be liable for the full/original tax debt, plus penalties and interest.

If your OIC is rejected, you are allowed to request an appeal within 30 days. To file an appeal with the IRS, use Form 13711 (Request for Appeal of Offer in Compromise).

If you don’t hear back from the IRS within 2 years after submitting an offer, your OIC will be automatically accepted.

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The offer in compromise program can be very complicated. It’s generally recommended that you seek the advice of a tax professional or tax attorney to help you with this matter.

For more information about resolving past due taxes, visit our Tax Debt Relief page.