What's Involved With An IRS Offer In Compromise
Each year, nearly one out of every four Americans owes the government federal income taxes. For many of this 25%, the amount owed is overwhelming. They aren’t sure how they’ll be able to pay the debt.
Fortunately, the IRS has programs in place to help citizens square up and pay their debts, and one option worth exploring is an IRS Offer in Compromise. We’re going to cover what an OIC is, how to know if you qualify, how to apply, and how it will impact your life.
What is an IRS Offer in Compromise?
An IRS Offer in Compromise is an agreement between a taxpayer and the IRS that enables the taxpayer to settle their tax debt for less than the full amount that they owe. It sounds like a perfect solution if you find yourself owing taxes, but the reality is that it’s not a legitimate option for most people. An IRS Offer in Compromise is best for those who are unable to pay their full tax liability, or for those who would experience financial hardship if they were to pay their full tax liability.
The IRS will determine your eligibility for an Offer in Compromise based on these criteria:
- Ability to pay
- Asset equity.
It’s important to understand that the IRS doesn’t hand out OICs like candy, but they consider each offer and determine if the amount offered is the most they can expect to receive within a given period of time. As a note, you should explore all other options before applying for an Offer in Compromise.
Fortunately, to save some time, the IRS has a handy tool to help you determine whether you qualify. It takes your tax filing status, demographic, and financial information into consideration in order to give you an idea of what to expect, should you decide to file for an Offer in Compromise.
With that said, the IRS ends up denying most Offers in Compromise based on the taxpayer’s information and ability to pay. In fact, more than 16 million individuals and 3 million businesses owed taxes to the IRS in 2017, yet only around 25,000 settled their tax debts through an Offer in Compromise.
Next steps: If you qualify for an Offer in Compromise
Just like any other government or IRS program, you’ll be required to submit a form for the IRS to assess. You’ll want to review and complete all documents in the Form 656-B Booklet in order to be considered, and it’s best to seek the advice and guidance from an established tax solutions expert before you submit your Form 656. This booklet includes the following:
- Form 433-A (OIC) (individuals) or 433-B (OIC) (businesses) and all required documentation as specified on the forms,
- Form 656(s) – individual and business tax debt (Corporation/ LLC/ Partnership) must be submitted on separate Form 656,
- $186 application fee (non-refundable),
- Initial payment for each Form 656 (non-refundable).
Your Offer in Compromise also entails submitting an initial payment option, outlined below.
Lump Sum Cash — This means you will submit an initial payment of 20% of the total offer amount with your application. If your offer is accepted, you’ll receive written confirmation (the IRS does not correspond over the phone, email, or social media). Any remaining balance due on the offer will then be paid in five payments or less.
Periodic Payment — You’ll submit your initial payment with your application, then continue paying the remainder of your debt in monthly installments while the IRS considers your offer. You’ll receive a decision in writing from the IRS, and then you’ll continue to pay monthly until your balance is paid in full, usually within six to 24 months.
Overall, the IRS expects that your initial payment will be equal to or greater than the value of your assets (owned property, vehicles, bank accounts, etc.) plus your anticipated future income less living expenses. The math involved here can be complex and confusing, so ask a certified tax solutions expert for help determining the best offer to make.
As you might expect, there are important details to consider while the IRS reviews your offer:
- Your payments and fees (non-refundable) will be applied to your tax liability. You may designate payments to a specific tax year and tax debt.
- A Notice of Federal Tax Lien may be filed.
- Other collection activities will be suspended.
- Your legal assessment and collection period will be extended.
- You must make all required payments associated with your offer.
- You won’t be required to make payments on an existing installment agreement.
- The IRS will review your finances for up to two years while they consider your Offer in Compromise.
- In the event the IRS fails to make a determination within two years of the IRS receipt date, your Offer in Compromise will be automatically accepted.
- You must not owe the IRS any tax liability for five years immediately following your initial Offer in Compromise.
- You are entitled to appeal the IRS’ decision.
Next steps: If you don't qualify for an Offer in Compromise
It’s not the end of the world, but it may mean your path forward is a bit more difficult. As mentioned above, you can appeal a rejection from the IRS within 30 days by submitting a Request for Appeal of Offer in Compromise.
You should also reach out to a tax solutions specialist for guidance on how to proceed.
Will filing an Offer in Compromise affect my credit?
While the IRS may review your credit history as part of their evaluation of your OIC, your credit score will not be impacted by your compromise application. In fact, it’s unlikely that credit services would have any idea that you’ve submitted anything at all, so you should be safe.
The bottom line is to take your Offer in Compromise application seriously, and to rely on the trusted services of a certified tax solutions expert for help and guidance. Regardless of whether you plan to make an initial payment of a lump sum or embark on a series of periodic payments, you’ll want to make sure that your compromise application meets all the requirements and is submitted as accurately and honestly as possible. Explore all of your options before you take any action, including installment agreements.
An IRS Offer in Compromise may be exactly what you need to get back on your feet.