Offer in Compromise: How This IRS Tax Settlement Program Works

  • Accracy
  • 26th Nov, 2023

If you owe a significant amount on your taxes, and you don't know if you can pay it all back, you may have already heard of an offer in compromise (OIC). This plan, which allows you to pay back a portion of the taxes you owe instead of the full amount, is very difficult to qualify for—but, if you fit the criteria, it could be a solution to your tax debt.

Offer in Compromise: How This IRS Tax Settlement Program Works
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What is an offer in compromise?

With an offer in compromise, the IRS allows you to settle your tax debt for less than the full amount owed. This is why, if you've been searching online for tax debt solutions, you've probably seen companies advertising that they can settle your tax debt for pennies on the dollar (which is a misleading claim, considering the relatively small number of taxpayers who are able to get an offer in compromise).

 

In order to qualify for the program, you must show a legitimate reason for your inability to pay the entire amount of tax liability.

When you submit an offer amount, the IRS decides whether that's an acceptable number. If that number is more than what you offered, and you cannot provide supporting documentation about exceptional circumstances, you are given an opportunity to boost the offer amount. Failure to increase the amount means your application is rejected.

If the IRS determines instead that you can pay your full tax bill, you may request an installment agreement.

What if you disagree with the IRS' valuation of your ability to pay? You can provide additional information supporting your claim, and try to negotiate a lower number based on the evidence you provide. Find out if you qualify for Fast Track Mediation, which expedites the review of certain areas of dispute. However, Fast Track Mediation does not apply if you have already received a rejection letter.

How do you qualify?

Eligibility for an offer in compromise requires the taxpayer to have:

  1. Filed all required tax returns.
  2. Made all required estimated payments.
  3. Not currently be in open bankruptcy proceedings.
  4. Filed a valid extension request for the current year's return if applying for the current tax year.

What is Form 656?

Given the complexity of the offer in compromise application process, it's always best to engage a tax professional to help you. This could be a qualified CPA, a tax advisor, an Enrolled Agent, or a tax attorney.

If you're going it alone, however, you'll use the IRS' new Form 656 to apply for an offer in compromise. In addition, the Form 656 booklet includes Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals, and Form 433-B (OIC), Collection Information Statement for Businesses.

Offer in compromise pre-qualifier

Check out the IRS online tool, the offer in compromise pre-qualifier, to determine your eligibility. Here are the basic questions for qualifying:

  • Are you now in an open bankruptcy proceeding?
  • Are all required federal tax returns filed?
  • Are all required estimated tax payments made?
  • If you are self-employed with employees, did you submit all federally required tax deposits?

Those in a partnership, corporation, or residing in a foreign country or U.S. territory, are not able to use the OIC pre-qualifier. The same holds true for military personnel using an APO or FPO address.

Other reasons the IRS may reject an OIC application

Keep in mind that even if you aren't in bankruptcy, have filed all required tax returns, and made all your estimated tax payments, the IRS may still deny your application. Reasons could include:

  • The tax debt is court-ordered.
  • Not all required information was included in the application.
  • You did not receive a bill for a tax debt included in your offer amount.
  • Your case has already been sent to the Justice Department by the IRS.
  • Failure to pay the nonrefundable $205 application fee. This fee is waived for those with low incomes. For low-income certification, your adjusted gross income (AGI), determined by your most recently filed income tax return, is less than or equal to the amount shown on Form 656, Section 1. Low-income certification is also based on family size and residence.

What criteria does the IRS use in deciding whether to accept your offer in compromise?

Assuming you meet the pre-qualifications, how does the IRS calculate whether it will accept your OIC? First, the department uses your financial information to determine your Reasonable Collection Potential (RCP). In short, that's the amount it can get now and from your future income.

The IRS makes this determination by investigating your assets, including:

  • Bank accounts
  • Real estate
  • Motor vehicles
  • Current income
  • Future income

If the IRS concludes it will never fully collect your tax debt, it may accept your offer in compromise. If a true legal dispute exists regarding the tax debt or the full amount of income tax owed, it may grant an OIC.

You may also prove eligible for an OIC if paying the full amount results in economic hardship. Exceptional circumstances could also make paying the tax bill in full unfair or inequitable.

 

How long does the process take?

In general, the OIC process takes between seven and 12 months to complete. During that period of time, taxpayers are sending payments every month to the IRS. The department will usually decide whether to accept or decline your offer amount within six months of receiving the application.

How do you pay with an offer of compromise?

With an offer of compromise, you have two payment options, based on your offer:

Lump sum cash"“With your application, submit a 20 percent initial payment. If the IRS accepts the offer, the department will let you know in writing. Any remaining balance is due in five or fewer payments.

Periodic payment"“With this option, submit the first payment with your application. You must continue paying the remaining balance each month while the IRS determines whether it will accept your offer. If your offer is accepted, monthly payments continue until the total amount is paid.

Are there disadvantages to an offer in compromise?

During the offer process, the IRS may file a Notice of Federal Tax Lien. Via this public notice, creditors may find you owe a tax debt.

This tax lien is released if your offer amount is accepted and the entire amount is paid in full. In most cases, the Notice of Federal Tax Lien is not filed until the IRS makes its OIC qualifying decision.

What happens if you don't qualify?

For most taxpayers, the odds of qualifying for an OIC are low. If the IRS does not accept your offer of compromise, you have the right to file Form 13711, Request for Appeal of Offer in Compromise. File this form within 30 days of receiving the rejection of your offer.

Additional tax relief options

Even if you aren't eligible for the IRS offer in compromise program, there are other tax debt relief options available.

If you're having tax trouble with the IRS, Accracy's tax advisory services can help. We have a a network of enrolled agents and tax professionals who can assist you with applying for an offer in compromise, or setting up a different tax payment option . And as a first and critical step, Accracy can get your historical bookkeeping up to date, no matter how far behind you are.

Learn more about how Accracy works.

What to do next

If you're considering applying for an offer in compromise, your next step is to find out about your eligibility for an OIC using the IRS pre-qualifying tool. Whether or not you qualify, you'll be on your way to getting your tax debt sorted out so you can pay what you need to to get back on track.

 
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