A Comprehensive Guide to IRS Offer in Compromise

The Internal Revenue Service has become more open to various ways to work out delinquent taxes of the citizens across the country. However, you have to be proactive to negotiate with the agency and address any upfront problem you’re dealing with. As long as you build communication with the IRS, you can surely figure things out and find ways to settle your tax liability. So if you’re one of them, here’s a comprehensive guide to IRS Offer in Compromise to give you the best way to settle your tax debt. 

What is the IRS Offer in Compromise?

OIC or Offer in Compromise is a particular agreement between the Internal Revenue Service and a taxpayer to pay the tax liability that is less than the aggregate owed amount. However, in most cases, if you’re a taxpayer in the US and you can settle your taxes in an installment plan or other means that you’re eligible for, you won’t qualify for the OIC. 

Besides that, the Internal Revenue Service won’t accept an OIC unless you offer an amount that’s more than or at least equal to the RCP or the Reasonable Collection Potential in most cases. It’s because the agency will measure your ability to settle your tax liability through the RCP. That includes the value from your assets, like bank accounts, real property, automobiles, and many others. 

Moreover, only eligible individuals can make an OIC, and for you to find it out, you have to answer the Offer in Compromise Pre-Qualifier questionnaire online. It’ll ask you to provide your information and even the important details concerning your assets. Besides these, you are also required to list all of your expenses, like your mortgage, rental fees, vehicle-related expenses, and many others. Then, after providing and submitting all of the information on the questionnaire online, the website of the IRS will determine if you qualify for OIC. 

Offer in Compromise Pre-Qualifiers

Before you make an offer in compromise, you have to check if you’re eligible for it and understand what the IRS is looking for to accept an offer. So the first part of the eligibility test is your reason why you’re requesting an offer in compromise. 

The IRS will accept your offer if there’s doubt as to whether the agency has determined the correct amount of your taxes or the debt is completely collectible. It means that the aggregate amount of the income and assets you own is less than the real amount you owe. Also, the agency will consider your offer if the tax amount is correct but paying it in full may cause economic hardship. 

Also, the IRS will check your information to determine your ability to settle your owed taxes and the amount you can pay. The components that the agency will look into include your assets, income, and expenses. These will serve as their basis to know if you can pay your debt. Generally, the IRS will accept your offer that is equal to the maximum amount you can settle within a particular period of time. 

However, the IRS will not accept your offer if you’re in an open bankruptcy proceeding. If you also haven’t made the required payments for your estimated taxes and processed your returns, the agency will not accept your offer either. On top of that, if you’re self-employed and you have employees, but you also haven’t processed the tax deposits, the IRS rejects your offer as well.

You can use the pre-qualifier tool of the IRS to check your eligibility. But even if you do qualify for it, it doesn’t give you a guarantee that your offer will be accepted or approved. That’s why the agency keeps reminding the taxpayers to explore other payment options available before submitting an OIC.

How Much Should You Offer in Compromise to the IRS?

Most taxpayers tend to choose to make an offer as little as possible. But the offer that the IRS accepts will depend on your financial stability. That’s why you need to provide all of your important information in great detail when filing Form 433-A for self-employed individuals or employees or Form 433-B for business owners. 

So after providing all of these, the IRS will do the calculation of the minimum offer. Then, if your offer is more than that, the agency will allow you to increase the amount of your initial offer. But if your offer is less than the minimum offer, the IRS will reject that. Also, if the agency finds you capable of paying your debt, you may request a payment agreement on an installment basis. In addition, always keep in mind that the IRS will review every OIC submitted for any fraudulent intent. So if anyone is proven guilty of providing false statements or information, it’ll automatically be subject to criminal or civil penalties. 

An Illustration of Getting the OIC Settlement Amount

Let’s assume that the total owed taxes of the taxpayer is $50,000 in 2018, and the IRS has 100 months left to collect on the statute of limitations. Then, the NRE in assets, assuming that the only asset of the said taxpayer is the home, is $10,000 and the future MDI or monthly disposable income is $200. If this is the case, this taxpayer qualifies for an Offer in Compromise since both the assets and the income are not enough to settle the debt in full before the expiration of the collection statute. 

This is how the computation goes to determine the taxpayer’s eligibility based on the assumptions above. The ability to pay before the collection statute expires is $10,000 plus the $200 that the IRS can collect on a monthly basis for 100 months, which is a total of $20,000. Since the taxpayers owed $50,000, $30,000 will be taken out from that amount. It means that the IRS will not be able to collect the full amount of the owed taxes before the expiration of the collection statute. So the agency will essentially write off $20,000 at the end of the collection statute. 

With that, the taxpayer will not be required to pay $30,000, but the NRE computation and the MDI multiplier will be utilized, depending on the chosen payment option. So the taxpayer can choose to settle the offer amount through a periodic payment offer or a lump sum cash offer, which will be discussed later. 

For instance, the taxpayer will choose the lump sum cash offer that uses 12 months as the future income multiplier. The computed minimum offer amount is $12,400, which is the sum of $200 for 12 months and the $10,000 in NRE. This is an example of calculating an offer amount based on the assumptions above. Also, please note that the calculations of the MDI and NRE are very complicated. They have strict rules to follow to correctly determine the taxpayer’s eligibility for the Offer in Compromise. So if you miss any of these calculations, you may end up being not qualified or having a higher offer amount that you may encounter trouble in paying in the future. 

How to Submit an Offer?

Before submitting an offer, make sure to check if you’re eligible for it. Once done, if you’re still decided to do it, you can go ahead and proceed with your application. As mentioned above, to provide your detailed financial information, if you’re a business owner, you have to use Form 433-B, and if you’re an employee, you have to use Form 433-A. Then, you have to prepare for the non-refundable application fee of $205 and another non-refundable fee for the initial payment for each Form 656 that you also need to file. But keep in mind that if you qualify for the low-income exception, you are not required to pay for the application fee, but you have to submit the Application Sheet worksheet that you find from the Form 656 booklet. 

Moreover, if you’re a taxpayer who wants to submit an Offer in Compromise based on doubt as to liability, you have to process Form 656-L, and you don’t need to pay for any application fee in this case, as well. Besides that, if you’re submitting an offer based on doubt as to effective tax administration, you need to make use of the current version of Form 656 and include the filled-out Form 433-B for business owners or Form 433-A for employees and self-employed individuals. 

In addition, if in any case that you can’t be physically present to the IRS and you want a particular individual to represent you, you can sign Form 2848. It’s the IRS document that you need for you to authorize a person or even an organization to represent you by appearing before the IRS, especially during a tax audit or submitting your Offer in Compromise. Also, if you need legal advice or professional help and assistance from a tax expert for any reason, you need the IRS Form 8821 or the Tax Information Authorization. It allows someone to have legal access to your information. It may be the same as a power of attorney, but it grants less authority. 

Tips for Getting Your Offer in Compromise Approved

Here are some tips to help your IRS Offers in Compromise get approved below. 

• Always make your numbers accurate with supporting documents. As much as possible, avoid any bad math that will make the IRS reject or return your application for the OIC. 
• Avoid leaving items blank on the forms. It’s a simple mistake, but it’ll surely give you stress if your OIC gets rejected because one item wasn’t filled out with the correct information. So to avoid it from happening, you can put zero or N/A in the space provided on the form if that particular item does not apply to you. 
• To further help you do everything correctly, you can hire an expert with massive experience in doing OIC. Find someone who can recalculate every calculation to double-check every form before submission, ensuring that all numbers and information are accurate.

What to Do If Your Offer is Accepted

If the IRS has successfully accepted your Offer in Compromise, you can go ahead and settle the offer amount according to the terms that both parties have agreed upon. Then, the IRS will also keep any possible tax refund and interest due from overpayment of your taxes in a particular year when the agency finally accepts your Offer in Compromise. 

Besides that, if the IRS has already filed the Notice of Federal Tax Lien against you, the agency will also release it if the OIC payment agreement has been successful and completed. However, your offer will default if you can’t settle your OIC on or before the due date. That’s why you have to make sure to pay it on time for five years from the time your offer has been accepted, including any extensions. 

OIC Payment Options

These are the payment options of the IRS Offer Compromise below. 

Periodic Payment Offer

Under the tax law, if the offer is payable in six or more months through installment and within twenty-four months after the IRS accepts your offer, it is called a periodic payment offer. If you plan to submit this particular offer, you must include your first proposed installment payment in your Form 565. Keep in mind that you are required to pay for it besides the application fee, and it is not refundable. Also, you need to continue your installment payments following the terms of this offer while the agency is doing the evaluations of the periodic payment offer. But you have the right to choose the particular taxes you owe to which you can apply for the periodic payments. 

Lump Sum Cash Offer

As a taxpayer, you also have an option to settle the offer amount on an installment basis or in a lump sum. This particular payment offer is payable in five installments or less than that, within five months or fewer after the IRS accepts your offer. So if you want to submit a lump sum cash offer, you have to include a payment that is equal to 20% of the amount of the offer when you’re filing Form 656. Again, this amount is also non-refundable whether your offer is returned or rejected, and it’s part of the requirements besides the application fee that you also need to pay. 

What to do if Your Offer is Rejected?

If, in any case, that the IRS rejected your Offer in Compromise, you will be given a total of thirty days to appeal using Form 13711. The counting of thirty days will start on the date you can find on the rejection letter, and you also have to follow all of the instructions stipulated in it. Also, if you disagree with the result of your offer to the IRS and want to avoid any additional penalty and interest, you can send the full payment of the tax liability you owe or request for a payment agreement on an installment basis. 

What to Do if You Disagree with the IRS Valuation of Your Ability to Pay?

If you disagree with the valuation results of your ability to pay in the IRS, you can provide more documents or any verifications to support any differences in the numbers to the IRS employee who is currently working or investigating your Offer in Compromise. Also, to have a quick discussion in any areas of disagreement, you can also offer a telephonic conference to help expedite the review of your offer at any time of the day. 

FAQs

How likely is the IRS to accept an offer in compromise?

A lot of taxpayers in the United States apply for the Offer in Compromise in the Internal Revenue Service, but most of them don’t qualify for various reasons. Some of them may have future income or equity in assets that make them capable of paying their tax liability before the collection statute of the agency expires, which is generally ten years from the tax assessment date. Also, the IRS will make sure that every information you’ve submitted when you apply for OIC will be carefully reviewed. 

Does the IRS usually accept offers in compromise?

Every taxpayer has the right to apply for the Offer in Compromise as long as they’re eligible for that particular program. Then, the IRS will look into every single piece of information you’ve filed to determine if you will qualify to take advantage of the Offer in Compromise. However, the fact is that a lot of taxpayers who want to make an Offer in Compromise to the IRS aren’t eligible for it.  

Conclusion

If you’re dealing with any financial hardship right now and you’re not able to pay your tax liability in full, you can check your eligibility for the Offer in Compromise in the IRS. But, as mentioned earlier, you have to check other available ways for you to settle your tax debt to widen your option. In fact, this is what the agency is encouraging everyone to do, especially those with financial issues. So if you’re one of them and consider applying for Offer in Compromise, make sure to remember everything discussed above. Keep in mind that the accuracy of the numbers and every single piece of information you provide is very crucial to your application to this particular IRS program.