Taxes can be a costly expense for many people and in numerous ways. The fear of landing yourself in serious trouble with the IRS only amplifies the stress that some taxpayers may experience. However, many people might be unaware of the available options at their disposal. If you find yourself unable to pay your designated amount of taxes due, you might be eligible to apply for an offer in compromise.
What is an Offer In Compromise?
An offer in compromise, commonly referred to as an OIC, allows someone to settle their tax debt for less than the total amount owed. If paying your full tax liability causes you financial hardship, applying for an OIC might be the right option for you. The IRS approves an offer in compromise when the amount offered by a taxpayer is the most it can expect to collect within a certain window of time. While an OIC sounds like a valuable option, it definitely is not for everyone and most taxpayers will not qualify.
The standard requirements for receiving an OIC include:
- A taxpayer’s specific circumstances and financial situation
- A taxpayer’s income
- A taxpayer’s ability to pay
- Other expenses
- Asset Equity
If you’re interested in finding out your eligibility for an offer in compromise today, you can access the Offer in Compromise Pre-Qualifier on the IRS’ official website. This allows you to get a head start on planning your proposal to move forward in the process.
The Application Process
Now that you’ve discovered you’re eligible and would like to continue the process, you’ll need to do a handful of paperwork. The Form 656-B, Offer in Compromise Booklet PDF on the IRS’ website has everything you need to fill out. It includes:
- Form 433-A (OIC) for individuals or 433-B (OIC) for businesses, as well as the required documentation
- Form 656(s) for both individual and business tax debt (Corporation/ LLC/ Partnership) must be submitted on separate Form 656
- A non-refundable $205 application fee
- A non-refundable initial payment for each Form 656.
How Much Does the Non-Refundable Initial Payment Cost?
Applicants have two options to choose from when making their initial payment. However, the nature of your offer may also play a role in deciding which method you ultimately go with. Your two options are:
- Lump Sum Cash: This is an initial payment of 20% of the total offer amount with your application. After you’re approved, you will pay the remaining balance in five or fewer payments.
- Periodic Payment: Taxpayers can submit a proposed initial payment and afterward pay the remaining balance in monthly installments while the IRS processes their offer. If it is ultimately accepted, you can continue to pay the remaining balance in monthly installments. This whole process is usually completed in 6 or more monthly payments or within a 24 month period.
What if I Certify as Low Income?
If a taxpayer falls under the Low Income certification guidelines, they are not obligated to pay an application fee, initial payment, or make monthly installments while their offer is being evaluated.
What Can I Expect While My Offer is Being Evaluated?
You’ve made your initial payments and started your installments, but now you’re waiting to hear back from the IRS regarding your offer. During this waiting period, you can expect the following:
- Any non-refundable payments you made will be applied to your due taxes, but you have the option to specify which tax year or debt you’d like to allocate it to.
- Other IRS collection activities will be temporarily suspended
- The legal assessment and collection period for your tax filings is extended
- You are responsible for making all required payments
- You are not responsible for making payments on other existing installment agreements.
- Your case may be publicly documented via a Notice of Federal Tax Lien
- Your offer is automatically accepted if the IRS fails to make a determination within 2 years of its receipt date.
You’ve Heard Back: What’s Next?
If your OIC application has been accepted: congrats! But your work is not over yet. Taxpayers must file all required tax returns and make payments detailed in Section 7 of Form 656. Refunds received during the calendar year in which your offer was accepted will automatically be applied to your tax liability as well. Once you get that done, federal tax liens will finally be released. It should be noted that some information surrounding your offer can still be accessible to the public if a public inspection file is requested.
If your offer is rejected, you can still appeal a rejection within 30 days through a Request for Appeal of Offer in Compromise, Form 13711 PDF.
As previously stated, most taxpayers will not qualify for an offer in compromise; however, those who are interested could benefit from receiving professional assistance. For example, tax lawyers can be a helpful tool when trying to beat the odds in an OIC filing. The acceptance rate for these offers is extremely low, and it could be in your best interest to have a trained professional defending your case and ensuring all of your paperwork is properly filed.