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What is an Offer in Compromise (OIC)?

Tax debts can be a significant burden, causing stress and financial strain for individuals and businesses alike. Fortunately, the IRS offers various options to help taxpayers settle their debts, one of which is known as an Offer in Compromise (OIC). An Offer in Compromise is a valuable tool that allows eligible taxpayers to settle their tax liabilities for less than the full amount owed. This article aims to provide a comprehensive overview of Offers in Compromise, including how they work, eligibility requirements, the application process, and their potential benefits. 

Offer in Compromise Eligibility Criteria 

Not everyone qualifies for an OIC. In fact, many taxpayers don’t. Only about a third of OICS were accepted in 2022. The IRS evaluates each case based on specific criteria. The IRS offers an online questionnaire to determine eligibility. Generally, taxpayers must meet the following conditions to be eligible for consideration: 

  • Inability to Pay in Full: You must demonstrate that you are unable to pay the full amount of taxes owed. This could be due to financial hardship, limited income, or substantial expenses.  
  • Doubt as to Collectability: There must be a genuine doubt regarding their ability to collect the tax owed, whether it be now or in the future. 
  • Doubt as to Liability: There must be a genuine dispute regarding the amount of tax owed. For example, if the taxpayer believes that the IRS has incorrectly assessed their tax liability, they may qualify for an Offer in Compromise based on doubt as to liability. 

In addition to the above, you must be current on your tax filings and estimated payments. You must not be in an open bankruptcy proceeding. You must have a valid extension for the current year’s tax return (if applying for the current year). Finally, if you’re an employer, you must be up to date on all your tax deposits for the past 2 quarters. 

The Application Process 

Applying for an Offer in Compromise involves several steps, and it’s essential to follow the process carefully to maximize the chances of acceptance. The key steps typically include the following. 

Reviewing Eligibility 

Taxpayers should carefully review the eligibility criteria and ensure that they meet the necessary requirements before applying.  

Gathering Documentation 

The IRS requires extensive documentation to support the offer, including details of income, expenses, assets, and liabilities. Taxpayers must gather and submit all relevant financial information as part of their application. This part of the process is extremely time-consuming and exhausting. It’s not uncommon for the IRS to receive several boxes of documentation to support OICs.  

Completing the Forms 

The IRS provides specific forms for submitting an Offer in Compromise, such as Form 656, Offer in Compromise. In addition, you’ll need to submit Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, or Form 433-B, Collection Information Statement for Businesses. Taxpayers must complete these forms accurately and honestly, providing all requested information. Any bit of misinformation can result in rejection.  

Submitting the Offer 

Once the forms and supporting documentation are complete, taxpayers can submit their Offer in Compromise to the IRS along with the required $205 application fee and initial payment. The initial payment will depend on the payment option you choose, as well as your actual offer. When you select the Lump Sum Cash option, you’ll need to submit 20% of the total offer amount with your application. If your offer is accepted, you’ll need to pay the remaining balance within 5 payments or less.  

If you select the Period Payment option, you’ll need to submit an initial payment. You’ll need to make monthly installment payments while the IRS reviews your OIC. If the IRS accepts your offer, you will need to continue making these monthly payments until the balance is paid in full. 

Waiting for Review 

After receiving the offer, the IRS will review the application to determine its validity and whether the proposed settlement amount is acceptable. This process can take several months, during which the IRS may request additional information or clarification. 

Acceptance or Appeal 

If the IRS finds the offer acceptable, they will issue a formal acceptance, and the taxpayer must fulfill the terms of the agreement to settle their tax debt. If they reject the offer, you may appeal within 30 days using Form 13711, Request for Appeal of Offer in Compromise.  

Understanding Offers in Compromise 

An Offer in Compromise is essentially a settlement agreement between a taxpayer and the IRS. It enables taxpayers to resolve their tax debt by paying an amount that is less than the total amount owed. The IRS considers an OIC as a legitimate option for taxpayers who are unable to pay their full tax liability or if doing so would cause significant financial hardship. However, taxpayers should be aware of the OIC process. 

  • Any payments you submit with your application are non-refundable, even if the IRS rejects your offer. These payments are applied to your tax liability.  
  • During the review process, the IRS will suspend collection activities. However, they can still file a Notice of Federal Tax Lien. 
  • Submitting an OIC will extend your Collection Statute Expiration Date (CSED). This date is used to determine how long the IRS can legally collect from you. 
  • If you submit an OIC while you have an open installment agreement with the IRS, you may stop making payments on your installment agreement while your OIC is under review.  
  • Your OIC is accepted if the IRS does not decide within two years of receiving the application. This does not include appeal periods. 

Need Help with an OIC? Call Optima Tax Relief 

Offers in Compromise represent a valuable option for taxpayers struggling with unpaid tax liabilities. By allowing eligible individuals and businesses to settle their debts for less than the full amount owed, Offers in Compromise can provide a lifeline to those facing financial hardship or significant disputes regarding their tax liabilities. However, navigating the application process can be complex, and it’s essential for taxpayers to understand the eligibility criteria, gather necessary documentation, and follow the process carefully. For taxpayers burdened by tax debt, an Offer in Compromise may provide the opportunity for a fresh start and a brighter financial future. Optima Tax Relief has a team of dedicated and experienced tax professionals with proven track records of success.   

If You Need Tax Help, Contact Us Today for a Free Consultation