What Is an Offer in Compromise?

You file your annual tax return with the Internal Revenue Service (IRS) and discover you owe significantly more than what you can afford. High tax debts can create a feeling of anxiety and panic as you realize that you cannot afford to pay the full amount, even with the payment programs that the IRS offers. Thankfully, there is another option. You can file a request for an Offer in Compromise (OIC).

After your tax filing, you will submit an OIC for a lower amount than you owe, along with the application fee and initial payment. Upon approval, you will be in the OIC program, where you will make payments until you have paid the agreed-upon amount.

When Does the IRS Accept an Offer in Compromise?

The IRS won’t approve an OIC for all taxpayers. It will generally accept this type of offer for taxpayers who owe a significant amount and are looking to settle tax debts or owe back taxes.

The IRS is more likely to approve an OIC request if there is doubt about the tax liability and collectability. There needs to be a genuine legal dispute about the amount of correct tax debt. Another option is if the taxpayer’s debt is greater than their assets and income. When this happens, there is doubt about the taxpayer’s ability to pay the full amount. Finally, if the other two reasons don’t apply, the IRS may still approve entrance into the compromise program if the collection would create an economic hardship or would be unfair and inequitable because of exceptional circumstances.

Vivian Hoard, a tax attorney at Fox Rothschild in Atlanta, Georgia, discusses the importance of not ignoring a notice from the IRS that you owe a tax debt. “If you ignore it, then the IRS will issue a notice of deficiency. That gives you 90 days to file a petition in Tax Court. If you do not file a petition in Tax Court, the government will assess the tax and then collect the tax.”

Am I Eligible for an Offer in Compromise?

The IRS will consider several factors when determining OIC eligibility. Because an OIC request requires an application fee and nonrefundable payment, you may want to use the IRS’s Offer in Compromise Pre-Qualifier tool. While the IRS wants to collect the debt owed, it doesn’t want to put people into extreme economic hardship or dire financial situations.

To qualify, a taxpayer must have filed their tax returns, paid all required estimated tax payments for the current year, and be up to date on federal tax deposits for the current quarter and the two preceding quarters if they are a business. Hoard explains that pursuing an OIC can help people find tax relief. “You owe the tax even if you don’t know the tax. You owe the tax unless you can convince them to give you a tax audit reconsideration, or you can file an offer in compromise status to liability.”

How Much Will the IRS Settle For?

For the IRS to agree to a settlement, your tax debt must meet certain requirements. The first is that the amount owed must be over the Reasonable Collection Potential (RCP). The IRS uses this calculation to determine the taxpayer’s ability to pay their full tax debt. Taxpayers who can pay the full amount of their tax bill through an installment agreement won’t qualify for a settlement.

While there is no hard rule, the IRS will generally not accept an OIC offer if the amount is equal to or greater than the reasonable collection potential (RCP).

How Do I Request an Offer in Compromise?

When filing an OIC request, your reasoning for the request will dictate which forms you will use, application fees, and initiation payment amount. If you want to file an OIC request based on doubt as to collectibility or effective tax administration, you need to use Form 656 and Form 433-A (OIC) or Form 433-B (OIC). These forms will provide supporting documentation about your financial hardship status. The form requires a complete statement of financial information, including the taxpayer’s assets, monthly income, bank accounts, and living expenses. An OIC request based on doubt of collectability requires the taxpayer to include an application fee. For those who qualify, there are low-income exceptions to the application fee.

Alternatively, if you wish to file an OIC request based on doubt as to liability, you will need to use Form 656-L. No application fee is required if the OIC is based on doubt as to liability.

Generally, an OIC request can take between seven and 12 months to complete. If the IRS doesn’t make a determination on your OIC request within two years of receiving it, then it is automatically accepted. This doesn’t include the appeal period.

Collection Process Suspension

The collection time period is suspended while the OIC request is pending and for 30 days after a rejection. If the taxpayer files an appeal, collection activities are suspended during this process.

How Do I Pay the Offer in Compromise?

After your OIC is accepted, you will need to start making your agreed-upon payments. Payments are accepted by check or money order. Credit cards are not an accepted payment method.

When you applied for your OIC, you chose a payment method. This is done at the time of application because you need to choose a payment method to know the amount of your initial payment.

Lump Sum Cash Offer

A lump sum cash offer means you will pay your OIC in full in five or fewer payments and within five months of the OIC being accepted. If you choose this payment method, you must include two checks with your OIC request. One check is the application fee. The other check is a nonrefundable initial payment.

This payment must be 20 percent of the OIC offer amount in the request. Generally, this payment won’t be returned if the request is rejected or returned. The amount will be applied to your tax debt. However, if you have multiple tax debts, you can designate which tax debt you want the payment applied to.

Periodic Payment Offer

If you cannot repay your OIC amount within the constraints of the lump sum, then the periodic payment offer may be the better option. A periodic payment offer will have over six monthly installment payments and require full repayment within 24 months of the offer acceptance.

Similar to the lump sum offer, you will need to include your first periodic payment installment with your OIC request. While this payment is also nonrefundable, it is typically much lower than the lump sum initial payment. The taxpayer is also required to make additional periodic payments in accordance with the installment agreement while the IRS determines the OIC request. These additional installment payments are also nonrefundable.

What if I Don’t Follow the Terms of the OIC?

It is important to understand and follow all of the terms of your OIC. If you fail to do this, the IRS will consider the OIC in default. Missing the monthly payments or not filing your taxes can result in the IRS determining you are in default of your agreement.

The IRS will resume collection activities to obtain the outstanding balance that you owe. This could include the tax lien that is on your property, garnishing future income, and charging additional interest and penalties. You will also owe the original whole amount minus any payments you may have made.

What if the IRS Rejects My OIC Request?

There are a few reasons the IRS may reject your OIC request. If the IRS rejects your request, you will receive a letter in the mail explaining its reasoning. The letter will also explain how to initiate the appeals process. The appeal will go to the IRS Independent Office of Appeals. If a taxpayer wants to file an appeal, it must be done within 30 days of the rejection letter date. To file an appeal, you will need to use the Request for Appeal of Offer in Compromise, Form 13711.

Request For More Information

The IRS may not approve your OIC but may not reject it either. You may receive a letter requesting more information. This is not a bad thing. This means that the IRS needs more documentation or information to make its determination. Send the IRS what it is requesting so that you don’t delay the process.

Returned OIC

In some situations, the IRs may return the OIC to the taxpayer. This isn’t a rejection, so you cannot appeal it. However, you are not barred from resubmitting it. A return of an OIC typically means you need to correct something for the IRS to continue considering the OIC request. These are some common reasons for a returned OIC request:

• The taxpayer didn’t submit the necessary information.
• The taxpayer filed for bankruptcy.
• The taxpayer failed to include a required application fee or nonrefundable payment with the offer.
• The taxpayer hasn’t filed required tax returns or paid current tax liabilities at the time the IRS is considering the offer.

Have Questions? Contact an Experienced Tax Law Attorney

If your tax bill is more than what you can afford, you may have the ability to request an offer in compromise from the IRS. While an OIC isn’t available to everyone, it can be a helpful solution for those who owe a significant amount of money. Speaking with a tax professional or a tax attorney can help you determine eligibility and how much you would owe if approved.

Visit the Super Lawyers directory to search for a tax attorney who can help you pursue a personal injury lawsuit. For more information, read our guide on when to call a tax attorney instead of an accountant.