Top Tips for Successfully Navigating an Offer in Compromise

September 13 , 2024

An Offer in Compromise (OIC) allows taxpayers to settle their tax debt for less than the amount owed. If you’re struggling with tax payments, an offer in compromise might be a viable solution. This article will guide you through understanding, eligibility, and the application process for an OIC, including how to make an Offer in Compromise effectively.

Key Takeaways

• An Offer in Compromise (OIC) allows taxpayers to settle their tax debts for less than the full amount owed, provided they meet specific eligibility requirements, including filing all necessary tax returns.
• The process involves submitting IRS Form 656 along with detailed financial information; applicants can choose between lump sum or periodic payment options to settle their tax debts.
• If an OIC is accepted, taxpayers must adhere to payment terms and continue filing future tax returns to avoid reinstatement of federal tax liens and ensure complete resolution of their tax debt.

Understanding an Offer in Compromise (OIC)

An Offer in Compromise (OIC) is a powerful tool that allows taxpayers to settle their tax debts for less than the full amount owed. This program is designed to help those who are struggling to pay their tax bills while maintaining a reasonable standard of living. It’s a lifeline for individuals who find themselves in financial distress, offering them a chance to clear their debts and start anew.

Taxpayers usually need a low monthly income and minimal assets to qualify for an OIC, ensuring the offer reflects their actual financial situation rather than an attempt to evade taxes. When applying, taxpayers must submit specific forms, such as Form 656 and detailed financial statements (Form 433-A for individuals or Form 433-B for businesses). These documents help the IRS evaluate the taxpayer’s financial situation accurately.

The OIC process is not just about reducing your tax liability; it’s about reaching a compromise that is in the best interest of both the taxpayer and the IRS. The IRS carefully evaluates each application to ensure that the amount offered represents the most they can reasonably expect to collect within a certain timeframe, considering the taxpayer’s financial situation and effective tax administration.

Understanding these fundamentals is the first step toward navigating the OIC program successfully.

Eligibility Requirements for an OIC

Before you can benefit from the Offer in Compromise program, you need to ensure that you meet the eligibility criteria. The IRS has set specific requirements that must be met to qualify for an OIC. First and foremost, taxpayers must file all necessary tax returns and make required payments for the current tax year. This includes fulfilling all estimated tax payment obligations.

Additionally, to qualify for an OIC, you must have received a bill for at least one tax debt included in the offer. Taxpayers involved in an open bankruptcy proceeding are not eligible for an OIC. If you are in bankruptcy, the IRS will return both your application and the fee submitted with it.

Employers need to have made tax deposits for the current and past two quarters. If an applicant does not qualify for an OIC, the IRS will generally reject the application. However, if you have a valid extension for the current year’s tax return, it is acceptable when applying for an OIC. Satisfying these eligibility criteria is essential for progressing with your compromise offer.

Steps to Apply for an OIC

Applying for an Offer in Compromise may seem daunting, but understanding the steps involved can make the process more manageable. The primary form required to apply for an OIC is IRS Form 656, along with Form 433-B for businesses. These forms provide the IRS with the necessary details about your financial situation.

The application fee for an OIC is $205, but it can be waived for individuals who meet low-income certification requirements. When submitting your application, you must provide detailed financial information, including your monthly income, assets, debts, rent, and expenses. This information is critical as it helps the IRS determine your ability to pay and the validity of your offer.

Submitting the first payment with your application is essential, demonstrating your commitment to resolving your tax debt. Accurately completing all required forms and payments can significantly boost your chances of success in the OIC program.

Payment Options for Your OIC

When it comes to settling your Offer in Compromise, the IRS provides two main payment options: a lump sum payment or periodic payment offers. Each option has its own set of requirements and benefits, allowing taxpayers to choose the one that best fits their financial situation.

The settlement amount is determined by adding the equity in your taxpayer’s assets to the total disposable income, evaluated over a 12-month period. It’s crucial to report your income and expenses accurately, as inadequate reporting can jeopardize your OIC opportunity.

While the IRS reviews your application, you are required to continue making payments as specified in your accepted OIC.

Lump Sum Payment

Opting for a lump sum payment allows you to settle your tax debts with an upfront payment followed by a balance payment within a specified timeframe. To choose this option, you must pay 20% of the offer amount upfront and the remaining balance within five months. This method can be advantageous if you prefer to resolve your tax debt quickly and can manage the larger initial payment.

However, it’s important to note that if the IRS rejects your OIC offer, the 20% payment is nonrefundable and will be applied to your tax bill. This risk underscores the importance of submitting a well-prepared and realistic offer.

Periodic Payment Offer

A periodic payment offer allows taxpayers to make monthly payments while the IRS reviews their OIC application. This option requires the taxpayer to send the initial payment with the application and continue making payments until the balance is cleared.

Qualifying for low-income certification waives the application fee and initial payment, with no monthly payments required during the review. This option is less burdensome for those needing to spread payments over a longer period, making it more manageable.

How the IRS Evaluates Your OIC

The IRS uses a methodical approach to evaluate an Offer in Compromise. One of the key metrics is the Reasonable Collection Potential (RCP), which assesses the amount that can be collected from a taxpayer. The IRS evaluates several factors, including your monthly income, expenses, assets, and living costs, to determine your RCP.

For an OIC to be considered, the offer must equal or exceed your RCP. This means that the IRS needs to see that your offer is the most they can reasonably expect to collect within a certain timeframe. Knowing the IRS evaluation process enables you to prepare a stronger, more convincing offer.

What Happens After Acceptance

If your OIC is accepted, you must adhere to the terms of the agreement to ensure that your tax debt is fully resolved. This includes paying the offered amount and complying with all terms, such as filing future tax returns and paying any taxes due on time for the next five years.

For those who opted for a lump sum payment, the remaining balance must be settled within five payments after the initial 20% payment. Following the agreed payment schedule and filing all required tax returns for the next five years is essential to avoid federal tax lien reinstatement.

The IRS will not release federal tax liens until all terms of the accepted offer, including payment obligations, are completely fulfilled. This guarantees the IRS collects the agreed amount and ensures your compliance with taxpayer’s tax liabilities.

Potential Downsides and Risks of an OIC

While an Offer in Compromise can be a lifeline, there are potential downsides and risks to consider. A major risk is the non-refundable nature of payments made during the application process. This means that if your offer is rejected, you won’t get your initial payments back.

Applying for an OIC involves extensive financial disclosure, which can be burdensome and raise privacy concerns. During the evaluation period, interest and penalties may continue to accrue, potentially increasing your debt.

The OIC process is also complex and has a low acceptance rate, meaning many applicants may be disappointed. These aspects emphasize the need to carefully consider if an OIC is the right choice for you.

Rejection is a common outcome for OIC applications. If the IRS rejects your OIC, the first payment is non-refundable and will be applied to your tax bill. However, you have the option to request an appeal within 30 days by filing Form 13711 or a letter with specific information about your case. This gives you another opportunity to present your case and possibly get your offer accepted.

Other Tax Relief Options

If an Offer in Compromise is not suitable for you, there are other tax relief options available. Consider alternative options like installment plans and currently not collectible status. These options can provide relief by allowing you to pay your tax debt over time or temporarily suspending collection activities if you are unable to pay.

Exploring these alternatives helps find a solution that fits your financial situation and provides necessary relief.

Suspension of Collection Activities

One of the benefits of applying for an Offer in Compromise (OIC) is the suspension of collection activities by the IRS. While the IRS reviews your accepted offer, other collection activities are suspended, and the taxpayer’s legal collection period is extended.

During the OIC review, the IRS halts all collection efforts, offering relief from immediate tax pressures and allowing you to focus on resolving your tax debt.

How We Can Help with Your Offer in Compromise

Navigating an Offer in Compromise can be complex, but you don’t have to go through it alone. At Eco-Tax, our team of tax professionals specializes in helping clients understand the OIC process, determine eligibility, and submit realistic, well-prepared offers to the IRS. We work with you to ensure that your application reflects your true financial situation and maximizes your chances of success.

With our expertise and personalized guidance, we can help you resolve your tax debt and regain control of your financial future. Whether you’re considering an OIC or exploring other tax relief options, we’re here to provide the support you need at every step of the way.

Contact us today to learn how we can help you navigate the Offer in Compromise process and achieve the financial relief you deserve.