Offer in Compromise (OIC) is a program by the Internal Revenue Service (IRS) that allows taxpayers to settle their tax debts for less than the full amount owed. This can be a viable option for those facing financial hardship or burden due to back taxes. To be eligible for an OIC, taxpayers must meet certain criteria set by the IRS, which considers factors such as inability to pay, economic hardship, and equity.
Preparing for an OIC submission involves gathering pertinent financial information, including assets, income, expenses, and liabilities. Subsequently, applicants need to complete the required IRS forms, such as 433-A and 656, and submit them along with the supporting documentation. Throughout the application process, taxpayers should stay vigilant and be aware of scams or companies promising unrealistic outcomes for a high fee.
Key Takeaways
- The IRS offers an Offer in Compromise program to help eligible taxpayers settle their debts for less than the full amount owed.
- Proper preparation, including gathering accurate financial information, is critical for a successful OIC submission.
- Applicants should remain cautious and informed, as scams and false promises can be prevalent during the process.
Understanding Offer in Compromise
Eligibility Requirements
An Offer in Compromise (OIC) is an agreement between a taxpayer and the Internal Revenue Service (IRS) allowing the taxpayer to settle their tax debt for less than the full amount owed. To be eligible for an OIC, a taxpayer must demonstrate that paying the full tax liability would cause financial hardship or that there is doubt as to the accuracy of the tax debt. The eligibility of an applicant is determined based on:
- Ability to pay: The taxpayer must be unable to pay their tax debt in full or through an installment agreement.
- Income: The taxpayer’s income, assets, and living expenses will be considered.
- Compliance: Applicants must be current with their tax return filings and must not have any open bankruptcy proceedings.
Benefits of an OIC
There are several advantages to applying for and obtaining an Offer in Compromise:
- Reduced Tax Liability: The primary benefit of an OIC is the opportunity to settle tax debts for less than the full amount owed.
- Avoiding Further Collection Actions: When a taxpayer’s OIC is accepted, the IRS will cease collection actions and refrain from instituting liens or levies against the taxpayer’s property.
- Flexible Payment Options: The IRS allows taxpayers to propose payment plans for the agreed-upon settlement amount.
Key Terminology
To better understand the Offer in Compromise process, here are some important terms to know:
- Form 433-A (OIC): An IRS form required for individuals applying for an OIC. It requests financial information to assess the taxpayer’s ability to pay the tax debt.
- Form 433-B (OIC): Similar to Form 433-A (OIC), but applicable to businesses applying for an OIC.
- Lump Sum Offer: A type of OIC payment plan that requires the taxpayer to pay 20% of the total offered amount upfront and the remaining balance within five or fewer months of acceptance.
- Periodic Payment Offer: Another type of OIC payment plan where the taxpayer makes the first payment upon submitting the proposal and then continues to make monthly payments while the IRS reviews the offer.
In conclusion, an Offer in Compromise is a valuable option for taxpayers who face significant tax debts they are unable to pay. By understanding the eligibility requirements, benefits, and key terminology, individuals and businesses can make informed decisions regarding the OIC process.
Preparation for OIC Submission
Gathering Financial Information
Before submitting an Offer in Compromise (OIC) to the Internal Revenue Service (IRS), it’s essential to collect all relevant financial information. This process involves documenting your income, expenses, and assets. A thorough overview of your financial situation will help determine if you’re eligible for an OIC and assist the IRS in evaluating your offer.
To gather your financial information, consider the following steps:
- Compile documentation for all sources of income, such as wages, self-employment earnings, and investment returns.
- Detail all of your expenses, including housing, utilities, transportation, and any additional living expenses.
- List all your assets, including real estate, vehicles, bank accounts, and investments.
It’s crucial to be as accurate and complete as possible when gathering this information, as errors or omissions may result in an unsuccessful OIC application.
Completing the Application Forms
With your financial information in hand, you can now proceed to complete the necessary forms for an OIC submission. The main forms you will need to complete are Form 656 and either Form 433-A or Form 433-B, depending on your status as an individual or a business.
- Form 656 – Offer in Compromise: This form is where you provide details about your tax debts and propose a payment amount for the OIC. You should list all your joint and separate tax debts in this form and mention the offer amount based on your financial capabilities.
- Form 433-A (OIC) – Collection Information Statement for Wage Earners and Self-Employed Individuals: If you’re submitting an OIC as an individual, you will need to complete Form 433-A (OIC). This form requires you to provide a comprehensive overview of your financial situation, including your income, expenses, and asset information.
- Form 433-B (OIC) – Collection Information Statement for Businesses: If you’re submitting an OIC on behalf of a business, you will need to complete Form 433-B (OIC). This form is similar to Form 433-A (OIC) but tailored for businesses, requiring information on the company’s income, expenses, and assets.
By carefully gathering your financial information and thoroughly completing the necessary forms, you’ll be well-prepared to submit an Offer in Compromise to the IRS. Remember to review all the information you provide and ensure that it is complete and accurate to improve your chances of having a successful OIC application.
Application Process and Procedures
Assessing Payment Options
Before applying for an Offer in Compromise (OIC) with the Internal Revenue Service (IRS), applicants should first assess their payment options. The IRS provides various payment methods, ranging from short-term payment plans to long-term installment plans. It’s essential to evaluate one’s financial capabilities and choose a plan that aligns with their financial situation. When applying for an OIC, applicants must also consider the required $205 application fee and initial payment, which are non-refundable.
Understanding the Offer in Compromise Booklet
The IRS provides a comprehensive Offer in Compromise Booklet, also known as Form 656 Booklet, which serves as a detailed guide for taxpayers. This booklet contains useful information, including:
- Explanation of OIC requirements and eligibility criteria
- Instructions for filling out Form 433-A (OIC) for individuals or Form 433-B (OIC) for businesses
- Guidelines on calculating an acceptable offer amount based on financial analysis
- Overview of the OIC application process and required documentation
- Payment options and offer terms
It’s recommended that applicants thoroughly review this booklet to gain a clear understanding of the OIC process and ensure they submit accurate and complete documentation with their application.
Using the Pre-Qualifier Tool
Before submitting an OIC application, the IRS encourages taxpayers to use the Offer in Compromise Pre-Qualifier Tool. This interactive online tool helps determine one’s eligibility for the OIC program and calculate a preliminary offer amount based on the provided financial information. Utilizing this tool is beneficial as it allows taxpayers to better understand their eligibility and potential offer amount before they start the formal application process.
In summary, when applying for an Offer in Compromise with the IRS, applicants should assess their payment options, understand the Offer in Compromise Booklet, and use the OIC Pre-Qualifier Tool to ensure a smooth application process. Proper planning and preparation, along with accurate documentation, will improve the chances of a successful OIC application.
Making an OIC Agreement
When taxpayers are unable to pay their tax debt in full or if paying the full amount would result in a financial hardship, they can consider making an Offer in Compromise (OIC) agreement with the Internal Revenue Service (IRS). An OIC is an agreement between a taxpayer and the IRS that allows the taxpayer to settle their tax liabilities for less than the full amount owed. In this section, we will discuss how to determine offer terms and set up periodic payments for an OIC agreement.
Determining Offer Terms
To determine the offer terms, a taxpayer must complete an application package. This process includes submitting the following:
- Form 433-A (OIC) for individuals or Form 433-B (OIC) for businesses
- All required documentation specified on the forms
- Form 656(s) for both individual and business tax debts (Corporations/ LLC/ Partnership) on separate forms
- A non-refundable $205 application fee
Before submitting an application, taxpayers can utilize the Offer in Compromise Pre-Qualifier tool to assess their eligibility. This tool, in a questionnaire format, assists taxpayers in gathering the necessary information and provides instant feedback on their qualification based on the input provided.
Setting Up Periodic Payments
Once the IRS accepts an OIC, taxpayers can choose between two types of periodic payment offers for settling their debts:
- Short-Term Periodic Payment Offer: The taxpayer makes payments for 6 to 24 months from the time the IRS accepts the offer. Payments must be made during the evaluation of the offer as well as after acceptance.
- Deferred Periodic Payment Offer: The taxpayer pays the offer in equal monthly installments over the remaining statutory period for collecting the tax. Payments must begin with the first month after submission of the offer and continue during the evaluation process.
It is essential for taxpayers to make timely and consistent payments, as failure to do so may result in default of the OIC agreement. The IRS may also revise the terms of an OIC agreement or pursue alternate collection methods if a taxpayer does not meet their payment obligations.
Assessing and Handling Rejection
Understanding Reasons for Rejection
It is essential to understand that an Offer in Compromise (OIC) may be rejected by the IRS for various reasons. These reasons can include, but are not limited to:
- Inaccurate or incomplete documentation
- Failure to meet eligibility criteria
- Insufficient offered amount
When the IRS rejects an OIC, they typically provide an explanation, comparing the applicant’s Form 433-A/B (OIC) with the Income/Expense Table (IET) Worksheet and/or Asset/Equity Table (AET) Worksheet. By examining these worksheets, applicants can identify the discrepancies that led to rejection.
Right to Appeal
In the event of rejection, applicants have the right to appeal the decision within 30 days of receiving the notice. The process begins with identifying specific items of disagreement and submitting a written appeal to the IRS. Applicants should provide a clear explanation of why they believe the rejection is unfounded and present supporting evidence to bolster their case.
Filing an appeal does not guarantee that the IRS will accept the OIC, but it provides an opportunity for the applicant to address any discrepancies and be reconsidered. Remember, it is important to act promptly and follow the guidelines set by the IRS to maximize the chances of a successful appeal.
Compliance and Aftercare
Following the Compliance Rules
After accepting an Offer in Compromise (OIC), the taxpayer must adhere to specific compliance rules to maintain the agreement with the Internal Revenue Service (IRS). One of the critical aspects is maintaining future tax compliance. This involves filing all required tax returns and making full payments of tax obligations on time for the following five years.
Additionally, the taxpayer must fulfill any current installment agreements with the IRS, including making timely payments. Timely tax deposits are also essential, especially for business owners. They should ensure the prompt submission of federal tax deposits, as failure to do so may result in the default of the OIC agreement.
Maintaining Future Tax Compliance
To uphold future tax compliance as part of the OIC terms, the taxpayer should take specific measures:
- File all tax returns on time: The taxpayer must submit all future tax returns by the due date each year, including extensions, if any.
- Pay all tax liabilities: Taxpayers should pay their tax debts in full, either with a lump sum or through an established installment agreement.
- Ensure federal tax lien satisfaction: After successful completion of the OIC and full payment of the agreed amount, the IRS will release the Notice of Federal Tax Lien associated with the tax debt. However, the taxpayer should proactively verify that the release has been processed.
- Make regular tax deposits: Business owners must ensure timely submission of federal tax deposits, and individuals should also make timely estimated tax payments if they are self-employed or have other tax obligations.
By following these guidelines, the taxpayer can successfully complete the OIC process with the IRS and avoid any complications in the future. Properly managing tax obligations is crucial to long-term financial stability and preventing the need to engage in future negotiations with the IRS.
Support Resources
Consulting with Taxpayer Advocate Service
The Taxpayer Advocate Service (TAS) is an independent organization within the Internal Revenue Service (IRS) that assists taxpayers in resolving their tax problems. TAS can help taxpayers understand the Offer in Compromise (OIC) process, explore payment options, and provide guidance on the required forms and documentation.
To get in touch with the Taxpayer Advocate Service, visit their website which offers comprehensive information and resources. For additional assistance, taxpayers can call the TAS helpline at 1-877-777-4778.
Using Low Income Taxpayer Clinics
Low Income Taxpayer Clinics (LITCs) represent individuals whose income is below a certain level and who need help with tax disputes. They can assist with the Offer in Compromise process, providing consultation and guidance to those who cannot afford professional representation.
LITCs are independently operated and receive partial funding from the IRS. They offer free or affordable services to eligible individuals. To find an LITC in your area, visit the IRS Low Income Taxpayer Clinic webpage.
Both the Taxpayer Advocate Service and Low Income Taxpayer Clinics can help taxpayers navigate the OIC process. They provide support by offering:
- A better understanding of various payment options
- Assistance with completing the necessary IRS forms
- Guidance on the required documentation for a successful OIC application
In addition, resources such as the Offer in Compromise Booklet (Form 656-B) offer step-by-step instructions on submitting an OIC application. Taxpayers may also consult the Offer in Compromise Frequently Asked Questions on the IRS website for clarification on commonly encountered questions and concerns.
By utilizing the support resources available, taxpayers can confidently navigate the Offer in Compromise process and work toward resolving their tax issues.
Frequently Asked Questions
What is the process for submitting an Offer in Compromise to the IRS?
To submit an Offer in Compromise (OIC) to the IRS, taxpayers should first ensure they have filed all required tax returns and are up to date with estimated tax payments. Complete and submit Form 656, the Offer in Compromise application, along with the required documentation and fees. You may do this by yourself or with the assistance of a tax professional.
How can I calculate an appropriate amount to offer in an Offer in Compromise?
To calculate an appropriate amount for your OIC, the IRS considers your ability to pay, income, expenses, and asset equity. Use the OIC Pre-Qualifier tool on the IRS website to help determine if you’re eligible and get an estimate of an appropriate offer amount.
What are the eligibility requirements for the IRS Fresh Start program?
The IRS Fresh Start program aims to help taxpayers who face financial difficulties and owe a significant amount of taxes. To be eligible for the program, you must be a taxpayer who owes $50,000 or less to the IRS and agrees to pay the liability through a direct debit payment plan or Offer in Compromise.
How long typically does it take the IRS to process an Offer in Compromise?
The processing time for an OIC can vary depending on the complexity of your case. In general, it may take anywhere from 6 to 24 months for the IRS to process and come to a decision on your OIC submission.
What is the standard fee for filing an Offer in Compromise with the IRS?
When submitting an Offer in Compromise, taxpayers must pay a non-refundable application fee of $205, along with the initial payment based on the offer terms. However, some low-income taxpayers may qualify for a fee waiver. Ensure to check the guidelines on the IRS website to see if you are eligible for the waiver.
Will accepting an Offer in Compromise impact my credit score?
Accepting an OIC may have an impact on your credit score, as the IRS reports the settled tax debt as “paid” or “settled for less than the amount owed” on your credit report. However, the extent of the impact will depend on various factors, including your current credit standing and the amount of tax debt.
