An offer in compromise (OIC) is a settlement agreement between a taxpayer and the Internal Revenue Service (IRS) in which the taxpayer agrees to pay a portion of tax liability rather than paying the whole amount owed.
As such, when a taxpayer is unable to pay their entire tax bill, an offer in compromise is an option. Also, an individual may opt to submit an OIC application when paying for the entire tax bill would cause them financial difficulty. Hence, the goal of this program is to reach a solution that benefits both the taxpayer and the agency.
If you want to have a deeper understanding of the IRS offer in compromise, read on and discover the essential things you must know about this program.
What is IRS Offer in Compromise
An offer in compromise permits you to pay less than the full amount of your tax bill. If you are unable to pay your full tax debt or if doing so would put you in financial hardship, it may be a viable choice. The Internal Revenue Service takes into account the following facts and circumstances:
- Ability to pay;
- Your income;
- Your Expenses; and
- Your Asset equity.
Generally, the IRS approves an offer in compromise when the amount offered is the most they can anticipate collecting within a reasonable period of time. Moreover, before submitting an offer in compromise, you should look into all alternative payment options. You must know not everyone is a good fit for the Offer in Compromise program.
Who Qualifies for an Offer in Compromise?
If the taxpayer is a business owner with workers, the taxpayer must have filed all tax forms, made all needed estimated tax payments for the current year, and made all required federal tax deposits for the current quarter to qualify for an Offer In Compromise. Usually, the Internal Revenue Service will reject an OIC unless the amount offered by the taxpayer is equivalent to or greater than the IRS’s Reasonable Collection Potential (RCP).
The RCP is the IRS’s method of determining a taxpayer’s ability to pay. The RCP takes into account the value of the taxpayer’s assets, such as automobiles, real estate, bank accounts, and other property. Aside from that, the RCP contains anticipated future income, less certain sums set aside for essential living expenditures.
How to Submit an Offer in Compromise?
Before submitting an Offer in Compromise (OIC), you must know whether you’re eligible to make an application or not. As such, if you’re facing an open bankruptcy proceeding, you are automatically not qualified. In addition to that, the Internal Revenue Service will return the newly filed Offer in Compromise (OIC) application if you have failed to file all required tax returns and haven’t made the required estimated tax payments.
Any initial payment made with the returned application will be applied to reduce your remaining balance. If there is a valid extension on the file, this policy does not apply to current year tax returns. Furthermore, you may use the Offer in Compromise Pre-Qualifier to check your eligibility and prepare a preliminary proposal.
Fee
When submitting an Offer in Compromise application, your completed offer package will include:
- Form 433-A (Offer In Compromise) (for individuals) or 433-B (Offer In Compromise) (for businesses) and all essential documentation as specified on the forms;
- Form 656(s) – individual and business tax debts(Corporation/ LLC/ Partnership) must be submitted on separate Form 656;
- $205 application fee (non-refundable); and
- Initial payment (non-refundable) for each Form 656.
The Process
While your OIC application is being evaluated, here are the things you should understand about the process:
- Your non-refundable payments and fees will be applied to your tax liability (you have the option of designating payments to a certain tax year and tax debt);
- Other collection activities are suspended;
- A Notice of Federal Tax Lien may be filed;
- The term for legal evaluation and collection has been extended;
- Make all necessary payments in connection with your offer;
- You are not obligated to pay on an existing installment agreement;
- If the IRS does not make a decision within two years of the IRS receipt date, your offer is automatically accepted.
How to Know Which Offer is Right for You?
There are two types of payment options for an offer; you must choose one of them and include payment with your offer. The first and subsequent payments will be determined based on the total amount you offer and the payment option you have selected.
You may choose one of these Payment Options:
- Lump-Sum Cash offer. Taxpayers have the option of paying the offer amount in one lump sum or in monthly installments. A “lump sum cash offer” is one that is paid in five or fewer payments over the course of five months—once the offer is accepted. If a taxpayer makes a lump-sum cash offer, he or she must include a nonrefundable payment equivalent to 20% of the offer amount, together with Form 656. In addition to the application cost, this payment is essentially required. Even if the offer is rejected or returned to the taxpayer without acceptance, the 20% deposit is often nonrefundable. The 20% contribution will instead be applied to the taxpayer’s tax liability.
- Periodic Payment Offer. If an offer is payable in 6 or more monthly payments and within 24 months of acceptance, it is referred to as a “periodic payment offer” under tax law. The first proposed installment payment must be included with Form 656 when submitting a periodic payment offer. This contribution, like the 20% deposit required for a lump sum cash offer, is usually nonrefundable. Additionally, while the IRS evaluates a periodic payment offer, the taxpayer must continue to pay the installment agreement specified under the offer’s terms. These funds are non-refundable. However, it can be used for the taxpayer’s tax responsibilities in which periodic payments can be applied.
Low-Income Certification
If you match the standards for Low-Income Certification, you won’t have to pay the application fee or the initial payment, and you won’t have to pay monthly payments while your offer is being evaluated.
However, Low Income Certification guidelines include where you live, the size of your family, and the monthly income of your household. As such, your initial expenses are waived if your family consists of three persons and your household income is less than or equal to $3,997/month. Further details can be found in your application package.
After Your Offer is Accepted
If your offer in compromise is accepted you must pay the offer amount stated on the acceptance agreement. Aside from that, these are the things that you should expect to happen when the IRS accepts your OIC application:
- You shall waive your right to contest the amount of the tax liability in court or otherwise.
- Any tax refund attributable to an overpayment of any tax or other liabilities due during the calendar year in which the IRS accepts your offer in compromise will be kept by the IRS, including any interest due. On top of that, It may not be possible to apply a refund or overpayment to estimated tax payments for the next year. If the offer in compromise is solely based on doubt as to liability only, this condition is not applicable.
- If the IRS has issued a Notice of Federal Tax Lien against you, it will be released once the payment terms of the offer in compromise have been completed.
What is the Acceptance Rate?
People of all ages and income levels realize the value of an Offer In Compromise. In 2017, the IRS accepted 25,000 out of 62,000 Offers in Compromise that were submitted; that’s a 40.3 percent approval rate or nearly $256 million in amount. The accepted proposals were for an average of $10,234.
When May IRS Return Your Offer?
When your offer in compromise has been returned, you must review the letter from the IRS to know the possible reasons as to why it turned out that way. On top of that, there will be no reconsideration if your offer has been returned for any of these reasons:
- When you have an open case in bankruptcy;
- When the IRS concluded that your offer was submitted only to delay;
- When you have been non-compliant with payment/filing after submitting the offer;
- When there are other pending IRS investigations;
- When the IRS concluded that the collection of the tax is in jeopardy; or
- When the original assessment has been abated.
What to Do if Your Offer is Returned?
If your offer has been returned and you believe there’s an error about this decision, you can request a reconsideration by contacting the number stated on the return letter; you must submit your objections within 30 days from the date of the letter. If the IRS agrees that your OIC should be reconsidered, you must then return the original Form 656 and Form 433-A (OIC) or 433-B (OIC) together with the application fee if returned, and IRS will open it as a new offer.
When May IRS Reject Your Offer
The Internal Revenue Service accepts less than half of the OIC applications it receives. As such, it is crucial to check your eligibility and make sure to submit all the required details when submitting an offer in compromise. However, if your offer has been rejected, IRS perhaps found reasons not to accept your OIC application. These reasons may include:
- Failing to submit required information substantiating your financial status.
- The offer is too low, and the government believes it can collect the entire payment from your future earnings – in which case the IRS will inform you what it thinks about how much you can afford to pay.
- You’ve been convicted of a serious crime.
- Failing to pay current tax obligations for the current calendar year.
What to Do if your Offer Gets Rejected
Since the IRS only accepts about half of the proposals in compromise it receives, your proposal is likely to be rejected. When the IRS rejects an OIC, you have two options. The first option is to resubmit an offer. If you do it within a month from the original offer, you won’t need a new Form 656; only a letter raising the amount you’re offering would suffice.
On the other hand, you may need to fill out a new Form 656 if you wait longer or the offer changes considerably. To appeal for denial, you must fill out Form 13711 within 30 days of receiving the letter, stating which portions of the decision you disagree with and why.
Downsides of an OIC
Providing the IRS with the vast amount of information it requires can be uncomfortable, but that isn’t the only disadvantage of submitting an OIC application. It can also take up a year to complete the process, and additional months if you decide to appeal.
Plus, you must also be compliant on all of your taxes for five long years if you want your Offer In Compromise to become final, and even a little blunder gives the IRS the power to rescind the agreement and seek full payment of the tax debts you believed you had avoided.
On top of that, an OIC also waives the 10-year statute of limitations the Internal Revenue Service has to obtain taxes from you. For instance, if it has been five years since the IRS assessed your taxes, it still has five years left to collect. Thus, if your OIC will take up a year to be evaluated and ends up rejected, the IRS has still several years to collect taxes against you.
Alternatives to OIC
When it comes to getting rid of tax debts that you can’t afford to pay, an Offer in Compromise is typically the best alternative. However, you still have other efficient options for decreasing your financial obligations and getting back on track.
If you aren’t eligible for an OIC or if your offer is turned down, consider debt settlement and consolidation as alternatives. They can often save you money on other obligations, allowing you to pay off your IRS payments faster.
FAQ
Does IRS usually accept an offer in compromise?
IRS only accepts about half of the proposals in compromise it receives, thus, a significant number of proposals are likely to be rejected. In 2017, the IRS accepted 25,000 out of 62,000 Offers in Compromise that were submitted; that’s a 40.3 percent approval rate or nearly $256 million in amount.
Who qualifies for an offer in compromise?
To qualify for an Offer In Compromise, the taxpayer must have filed all tax forms, made all needed estimated tax payments for the current year, and made all required federal tax deposits for the current quarter. Usually, the IRS will reject an OIC unless the amount offered by the taxpayer is equivalent to or greater than the IRS’s Reasonable Collection Potential (RCP).
Is an offer in compromise a good idea?
When there’s reasonable doubt about your ability to pay off your tax debt before it expires, an offer in compromise is a fantastic way to resolve your tax issues. If an OIC is not the best option for you, a tax professional can assist you in evaluating all available options.
Conclusion
When you’re facing a financial crisis and cannot be able to pay your entire tax bill, submitting an offer in compromise might be one of your best options. The goal of this program is to come up with a solution that can be beneficial for the taxpayer and the IRS. In fact, it can be considered as a fresh start from your IRS debt. Once IRS accepts your OIC, you won’t be looking over your shoulder with fear about getting your wages or bank accounts seized by the IRS.
