Understanding the Eligibility Criteria for Offer in Compromise with the IRS

The Internal Revenue Service (IRS) recognizes that certain taxpayers may face financial hardship or other extenuating circumstances that make it challenging to fulfill their tax obligations in full. To address these situations, the IRS offers the Offer in Compromise (OIC) program, which allows eligible taxpayers to settle their tax debts for less than the total amount owed.

Who Qualifies for an Offer in Compromise?

To be eligible for an Offer in Compromise, taxpayers must meet the following criteria:

• Filed all required tax returns: All individual and business tax returns must be filed before submitting an OIC application.

• Made all required estimated payments: Estimated tax payments must be made for the current tax year.

• Not in an open bankruptcy proceeding: Taxpayers cannot be involved in an active bankruptcy case.

• Valid extension for current year return (if applicable): If applying for the current tax year, a valid extension must be in place.

• Employer tax deposits: Employers must have made federal tax deposits for the current and past two quarters.

Additional Considerations

In addition to the eligibility criteria, the IRS also considers the following factors when evaluating OIC applications:

• Ability to pay: The IRS assesses the taxpayer’s current and future ability to pay the tax debt.

• Income and expenses: The taxpayer’s income and expenses are analyzed to determine their financial situation.

• Asset equity: The value of the taxpayer’s assets is taken into account.

Reasons for Offer in Compromise

The IRS may accept an OIC based on one of the following reasons:

• Doubt as to liability: There is a genuine dispute regarding the existence or amount of the tax debt.

• Doubt as to collectibility: The IRS determines that the taxpayer’s assets and income are insufficient to cover the full tax liability.

• Effective tax administration: Accepting the OIC would be fair and equitable due to exceptional circumstances or would create an economic hardship for the taxpayer.

Application Process

To apply for an Offer in Compromise, taxpayers must submit the following forms:

• Form 656: Offer in Compromise

• Form 433-A (OIC): Collection Information Statement for Wage Earners and Self-Employed Individuals (for individuals)

• Form 433-B (OIC): Collection Information Statement for Businesses (for businesses)

Payment Options

Taxpayers can choose between two payment options:

• Lump sum cash offer: A non-refundable payment of 20% of the offer amount is required upon submission. The remaining balance must be paid in five or fewer installments within five months of acceptance.

• Periodic payment offer: An initial payment is required, followed by monthly installments. Payments continue while the IRS evaluates the offer and must be made even if the offer is rejected.

The Offer in Compromise program provides eligible taxpayers with an opportunity to resolve their tax debts for less than the full amount owed. However, it is important to note that not all taxpayers qualify for an OIC, and the IRS carefully evaluates each application based on specific criteria and factors. Taxpayers who are considering an OIC should carefully review the eligibility requirements and consult with a tax professional to determine if they qualify and to assist with the application process.