An Offer in Compromise (OIC) is a settlement agreement between a taxpayer and the Internal Revenue Service (IRS) that allows the taxpayer to pay less than the full amount of taxes owed. The IRS may consider an OIC if the taxpayer can prove that they are unable to pay the full amount of their tax debt or that paying the full amount would create a financial hardship.
Factors Considered by the IRS
When evaluating an OIC, the IRS will consider a variety of factors, including:
- The taxpayer’s ability to pay
- The taxpayer’s income and expenses
- The taxpayer’s asset equity
- The amount of the tax debt
- The taxpayer’s history of compliance with tax laws
Eligibility Requirements
To be eligible for an OIC, the taxpayer must meet certain requirements, including:
- Having filed all required tax returns
- Not being in an open bankruptcy proceeding
- Having a valid extension for a current year return (if applying for the current year)
- Being an employer and having made tax deposits for the current and past 2 quarters before applying
How to Apply for an OIC
To apply for an OIC, the taxpayer must submit a completed Form 656, Offer in Compromise, along with the required supporting documentation. The taxpayer must also pay a non-refundable application fee of $205.
Payment Options
If the IRS accepts the OIC, the taxpayer will have two payment options:
- Lump-Sum Cash: The taxpayer must pay the full amount of the offer within five months of the acceptance date.
- Periodic Payment: The taxpayer must make monthly payments until the full amount of the offer is paid.
Benefits of an OIC
An OIC can provide several benefits to the taxpayer, including:
- Reducing the amount of tax debt owed
- Avoiding wage garnishment or property seizure
- Stopping the accrual of interest and penalties
Drawbacks of an OIC
There are also some drawbacks to an OIC, including:
- The taxpayer may have to pay a non-refundable application fee.
- The IRS may file a Notice of Federal Tax Lien.
- The taxpayer’s credit score may be negatively impacted.
Alternatives to an OIC
If an OIC is not a viable option, the taxpayer may consider other alternatives, such as:
- Installment Agreement: The taxpayer can enter into an installment agreement with the IRS to pay off the tax debt over time.
- Penalty Abatement: The taxpayer can request that the IRS abate (remove) penalties that have been assessed on the tax debt.
- Currently Not Collectible Status: The taxpayer can request that the IRS place their account in Currently Not Collectible status, which means that the IRS will temporarily stop collection activities.
An OIC can be a valuable tool for taxpayers who are unable to pay the full amount of their tax debt. However, it is important to understand the eligibility requirements, payment options, and potential drawbacks before applying for an OIC. If an OIC is not a viable option, the taxpayer should consider other alternatives, such as an installment agreement, penalty abatement, or Currently Not Collectible status.
IRS Offer In Compromise for Dummies
FAQ
How much should I offer for Offer in Compromise?
How much will the IRS usually settle for?
How likely is the IRS to accept an Offer in Compromise?
What is an example of an Offer in Compromise?
What is an offer in compromise (offer)?
An offer in compromise (offer) allows you to settle your tax debt for less than the full amount you owe. There are three types of offers. We will focus on Doubt as to Liability Offers first. Doubt as to Liability (DATL) offer – You have a legitimate doubt you owe all or part of the tax debt.
What is an offer in compromise (OIC)?
An offer in compromise (OIC) is an agreement between a taxpayer and the Internal Revenue Service that settles a taxpayer’s tax liabilities for less than the full amount owed. Taxpayers who can fully pay the liabilities through an installment agreement or other means, generally won’t qualify for an OIC in most cases.
How much does it cost to get an offer in compromise?
$205 application fee (nonrefundable). Initial payment (nonrefundable) for each Form 656. Documentation for Form 433-A (OIC) will include things like bank statements and pay stubs, Allec says. This is what the IRS will use to do the math and check your assets as well as calculate your offer in compromise amount.
What qualifies for an offer in compromise?
The criteria for qualifying are strict. Here are three situations the IRS will consider for an offer in compromise. Doubt as to liability: There’s a genuine dispute about the amount you owe, or whether you owe anything at all.