Are you overwhelmed by tax debt and looking for a solution? An IRS offer in compromise (OIC) might be the lifeline you need. This program allows eligible taxpayers to settle their tax debts for less than the total amount owed. In this article, we’ll explain what an OIC is, how to determine if you qualify, and what steps to take to apply.
Key Takeaways
- An IRS Offer in Compromise (OIC) allows eligible taxpayers to settle tax debts for less than the full amount owed.
- Eligibility for an OIC is determined by a detailed evaluation of financial circumstances, including income, expenses, and asset equity, and requires all tax returns to be filed.
- The application process for an OIC is complex, necessitating extensive documentation and forms, with potential fees that may be waived for low-income individuals.
Understanding the Offer in Compromise
An IRS Offer in Compromise (OIC) is a powerful tool designed to help taxpayers settle their tax debts for less than the full amount owed. The primary goal of the OIC is to reach a mutually beneficial agreement between the taxpayer and the IRS, providing relief for those who cannot meet their full tax liability due to financial constraints. This program can be a lifeline for taxpayers struggling to pay their taxes, allowing them to settle their taxpayer’s tax liabilities for less than what is owed.
The benefits of an OIC are substantial. The program offers a way out for those facing significant financial hardship, allowing taxpayers to settle their debts for less than the full amount. Assessing your eligibility is a crucial first step before starting the application process. A key factor in determining eligibility is the taxpayer’s assets, which are used to calculate the reasonable collection potential (RCP).
An OIC might be the right solution if you find yourself unable to pay your full tax debt or if doing so would create a severe financial hardship. Understanding this program’s intricacies can pave the way for financial relief and a fresh start.
Eligibility Criteria for an OIC
Determining eligibility for an Offer in Compromise involves a thorough evaluation of the financial situation of the taxpayer. They consider various elements, including income, expenses, and asset equity, to decide whether you qualify for the program. A household’s gross monthly income is a crucial factor in this evaluation, as it helps determine eligibility for low-income certification, which can affect application fees and payment options. Not everyone will qualify for an OIC, particularly those with significant assets or a stable income.
General Requirements
Eligibility for an Offer in Compromise requires meeting several general requirements. All your tax returns must be filed, and you should have received a tax bill for the included tax debt. Any required estimated tax payments for the current tax year must also be made. A valid tax filing extension is necessary if applying for an OIC for the current tax year.
For business owners, the requirements extend to ensuring that all required federal tax deposits are current for the current and two preceding quarters. All required estimated tax payments must also be made.
One important note: if you’re currently in an open bankruptcy proceeding, you are ineligible to apply for an OIC.
Financial Hardship and Economic Factors
Financial hardship plays a significant role in determining your eligibility for an Offer in Compromise. The IRS considers various aspects of your economic situation, including income, expenses, and assets, to assess whether paying your full tax liability would create financial strain.
Your household’s gross monthly income is evaluated against allowable living expenses to determine possible financial difficulty. The IRS will also analyze your assets, including any property or savings, as part of the OIC process. Taxpayer’s assets are crucial in determining the reasonable collection potential (RCP), which includes the value of various assets like real property and bank accounts. Understanding these financial and economic factors is crucial in determining whether the OIC program is a viable solution for you.
The Application Process for an Offer in Compromise
Applying for an Offer in Compromise involves a detailed and often lengthy process that requires you to provide extensive financial information. This process is not just about filling out forms; it involves sharing a complete picture of your financial situation with the IRS.
Required Forms and Documentation
To apply for an Offer in Compromise, you’ll need to complete and submit several forms. The primary forms required are IRS Form 656 and either Form 433-A (OIC) or 433-B (OIC), depending on whether you are an individual or a business. It’s crucial to include all necessary supporting documentation with your application.
Ensuring that all your tax returns are filed and current estimated payments are made is also a critical part of the application process. Complete and accurate documentation can significantly improve your chances of having your offer accepted.
Application Fee and Low-Income Certification
There is a $205 application fee for submitting an OIC, which can be waived for low-income individuals. To qualify for this waiver, your adjusted gross income or household’s gross monthly income must meet specific amounts based on family size and location.
Initial Payment Options
When it comes to making payments on an Offer in Compromise, you have two primary options: lump sum payments or periodic payments. For the lump sum option, you must make an initial payment of 20% of the offer amount, with the remaining balance payable in up to five additional payments. It’s important to note that the initial payment is non-refundable.
If you choose the periodic payment option, you must continue making payments while the IRS evaluates your application, unless you qualify for low-income certification.
Calculating Your Offer Amount
The amount you offer in an OIC is determined by evaluating your ability to pay, income, expenses, and taxpayer’s assets. The IRS uses a formula called Reasonable Collection Potential (RCP) to assess how much you can afford to pay towards your tax debts over time.
Understanding how to calculate your offer amount is crucial. It ensures that you propose a realistic and acceptable amount to the IRS, increasing the chances of your offer being accepted.
Reasonable Collection Potential
Reasonable Collection Potential (RCP) measures your ability to pay based on your taxpayer’s assets and anticipated future income. The IRS calculates RCP by considering your monthly disposable income, living expenses, and any assets that could be liquidated.
The factors considered in RCP include your current income, allowable living expenses, and the equity available in your assets. Providing complete financial documentation is essential to accurately determine your RCP.
Special Circumstances
Special circumstances, such as economic hardship or unique financial challenges, can significantly impact the minimum offer amount you need to submit. Exceptional situations, like long-term illness or significant financial obligations, may also affect the amount required.
Clearly explain these special circumstances on Form 656 if they prevent you from making the minimum offer. Proper documentation and explanation can help justify your proposed offer amount.
What Happens During the Evaluation Period
Once you’ve submitted your Offer in Compromise, it’s time for the IRS to evaluate your application. During this period, the IRS will suspend most collection activities, providing you with some breathing room. This means that the IRS will not levy your bank accounts or garnish your wages while your offer is being reviewed.
However, it’s important to understand that the IRS can still file a Notice of Federal Tax Lien during this period. Knowing what to expect during this evaluation period can help you stay prepared and manage your expectations.
Suspension of Collection Activities
When an Offer in Compromise is pending, the IRS suspends collection activities for the duration of the evaluation plus an additional 30 days if the offer is rejected. This suspension includes actions like levying your bank accounts or garnishing your wages. However, low-income certified applicants are not required to make initial payments during the evaluation period.
If the IRS does not act on your OIC within two years, the offer is automatically accepted.
IRS Review Process
The IRS review process is thorough and may involve requests for additional documentation. The IRS evaluates your financial situation, considering factors like income, expenses, and assets, to determine whether your offer is acceptable.
Staying responsive and promptly providing any additional information helps avoid delays in the evaluation. Consulting with a tax professional can be beneficial during this process to ensure that all requirements are met and your application is as strong as possible for effective tax administration.
Acceptance or Rejection of Your Offer
The decision to accept or reject your Offer in Compromise hinges on several factors, including your income, expenses, asset equity, and overall ability to pay. Submitting an OIC starts the evaluation process, but it doesn’t guarantee acceptance.
If the IRS cannot process your offer, they will return it along with the application fee and provide an explanation. Understanding what happens next can help you prepare for either outcome.
If the IRS Accepts Your Offer
If the IRS accepts your offer, you must comply with the payment terms outlined in the agreement. Failure to comply can result in the IRS terminating the agreement and collecting the original tax owed plus interest and penalties. The IRS has the authority to grant a one-time extension for a payment. This extension can be applied within a two-year period.
Any tax refunds due after the IRS accepts the offer will be kept by the IRS.
If the IRS Rejects Your Offer
If the IRS rejects your offer, they will provide written notification that includes reasons for the rejection and how to appeal. The application fee and any payments submitted with the offer are non-refundable.
You have the option to appeal the rejection within 30 days using Form 13711 or a letter. If the IRS thinks the offer is too low and there are no special circumstances, they may reject the offer or ask you to increase it.
Appealing an IRS Decision
If the IRS rejects your Offer in Compromise (OIC), you have the right to appeal the decision. The appeal process allows you to present your case to an independent reviewer, who will assess the IRS’s decision and determine whether it was fair and reasonable.
To appeal an IRS decision, you must submit a written request within 30 days of receiving the rejection letter. Your request should include a clear statement of the reasons why you disagree with the IRS’s decision, a detailed explanation of the facts and circumstances that support your position, and any additional documentation or evidence that supports your appeal.
You can submit your appeal request using IRS Form 13711, Request for Appeal of Offer in Compromise. Alternatively, you can submit a separate letter or statement, as long as it includes the required information.
The IRS will review your appeal request and may request additional information or documentation to support your case. If the IRS upholds its original decision, you may be able to appeal to the IRS Independent Office of Appeals, which provides an impartial review of your case.
It’s essential to note that the appeal process can be complex and time-consuming. If you’re considering appealing an IRS decision, it’s recommended that you consult with a tax professional or attorney who has experience with OIC appeals. This can help ensure that your appeal is well-prepared and has the best chance of success.
Potential Downsides and Risks of an OIC
While an Offer in Compromise can provide significant relief, there are potential downsides and risks to consider. The application fee and any payments made towards the offer are non-refundable, even if the offer is rejected. Additionally, the process requires disclosing detailed information about your income, debts, expenses, assets, and bank accounts.
If an OIC is rejected, the total debt might increase due to additional penalties and interest that accrue while the offer is being evaluated.
Common Mistakes to Avoid
When applying for an Offer in Compromise, it’s crucial to avoid common mistakes that can lead to rejection or delay. Here are some mistakes to avoid:
- Failing to file all required tax returns: The IRS will not consider an OIC application if you have unfiled tax returns. Ensure all your tax returns are filed and up to date.
- Not making required estimated tax payments: You must make required estimated tax payments for the current year to be eligible for an OIC. This shows the IRS that you are compliant with your tax obligations.
- Not making required federal tax deposits: Business owners with employees must make required federal tax deposits for the current quarter and the two preceding quarters. This is a critical requirement for business-related OIC applications.
- Underestimating your income or assets: The IRS will review your financial information to determine whether you can afford to pay your tax debt. Underestimating your income or assets can lead to rejection. Be honest and accurate in your financial disclosures.
- Not providing sufficient documentation: You must provide detailed financial information and supporting documentation to support your OIC application. Incomplete or insufficient documentation can result in delays or rejection.
- Not paying the application fee: You must pay the required application fee unless you meet the low-income certification requirements. Ensure you include this fee with your application to avoid processing delays.
- Not making the initial payment: You must make the initial payment with your OIC application unless you’re applying for a doubt as to liability OIC. This initial payment is a critical part of the application process.
By avoiding these common mistakes, you can increase your chances of a successful OIC application and reduce the risk of rejection or delay. It’s recommended that you consult with a tax professional or attorney to ensure that your application is complete and accurate. This professional guidance can help you navigate the complexities of the OIC process and improve your chances of achieving financial relief from your tax debt.
Maintaining Compliance Post-OIC Acceptance
Maintaining compliance is crucial after your OIC is accepted. Taxpayers must file their tax returns and pay all due taxes on time for five years following the acceptance of the OIC. Failure to comply with these terms can lead to the IRS declaring the OIC in default and enforcing the full tax liability.
If you fail to file and pay all taxes on time for five years after the OIC acceptance, the IRS will notify you that your offer is in default. To avoid this, it’s essential to stay vigilant and adhere to all tax laws and payment requirements.
Summary
Navigating the IRS Offer in Compromise program can be challenging, but it offers a viable solution for those struggling with overwhelming tax debt. By understanding the eligibility criteria, application process, and how to calculate your offer amount, you can increase your chances of having your offer accepted.
Remember, the key to success lies in thorough preparation and compliance. If you meet the criteria and need help with your tax debt, the OIC program could be your path to financial relief and a fresh start. Embrace the opportunity, and take the first step towards resolving your tax debt today.
Frequently Asked Questions
What is an Offer in Compromise (OIC)?
An Offer in Compromise (OIC) is a tax relief program that enables individuals to resolve their tax debt for less than the total owed, provided they fulfill specific eligibility criteria and are unable to pay the full liability. This option can help alleviate financial burdens for qualifying taxpayers.
Who is eligible for an Offer in Compromise?
To be eligible for an Offer in Compromise, you must have filed all tax returns, made any required estimated tax payments, and demonstrated financial hardship or economic challenges. Meeting these criteria is essential for both the taxpayer and the IRS to consider the agreement. Additionally, a household’s gross monthly income is a crucial factor in determining eligibility, as it must meet specific criteria based on family size and state of residence.
What forms are needed to apply for an OIC?
To apply for an Offer in Compromise (OIC), you must submit IRS Forms 656, and either 433-A (OIC) for individuals or 433-B (OIC) for businesses, along with all required supporting documentation.
What happens if the IRS rejects my OIC?
If the IRS rejects your Offer in Compromise (OIC), they will issue a written explanation and guide you on how to appeal the decision within 30 days using Form 13711 or by submitting a letter. It is crucial to follow their instructions promptly to ensure your appeal is considered.
How long does the IRS take to decide on an OIC?
The IRS typically takes several months to evaluate an Offer in Compromise (OIC), but if a decision is not reached within two years, the offer is automatically accepted.
_________________
For more information about the tax and accounting services we provide, visit our Home Page! The friendly CPAs, Enrolled Agents, tax professionals, and bookkeepers and accountants at Massey and Company CPA are here to assist you.
If you want my team and I to handle your tax matter for you, click here.
You are welcome to email me directly at gary.massey@masseyandcompanyCPA.com.
Massey and Company CPA is a boutique tax and accounting firm serving individuals and small businesses in Atlanta, Chicago and throughout the country. Our services include tax return preparation, tax planning for businesses and individuals, estates and trusts, IRS tax problem resolution, IRS audits, sales taxes and small business accounting and bookkeeping.
