Tax debt can be a daunting challenge for many individuals and businesses. Incurring debt with the Internal Revenue Service (IRS), whether due to financial hardships, errors in tax submissions, or late payments, can lead to considerable stress, penalties, and possible legal repercussions. When taxpayers cannot pay their full tax liability, the IRS offers a potential solution known as an Offer in Compromise (OIC). This program allows taxpayers to settle their tax debt for less than the full amount owed, providing relief in certain circumstances.
What is an Offer in Compromise?
An Offer in Compromise is an agreement between a taxpayer and the IRS that settles the taxpayer’s tax liabilities for less than the full amount owed. This option is available to those who can demonstrate that paying the full amount would cause financial hardship or that there is doubt as to the collectability of the full amount.
Types of Offers in Compromise
If you owe IRS the debt in this tax season 2025, understand the three types of OIC programs below to enroll.
- Doubt as to Collectability: This is the most common type of OIC. It applies when the taxpayer’s income, expenses, and asset equity indicate that they cannot pay the full amount of the tax debt.
- Doubt as to Liability: This type of OIC is used when there is a genuine dispute about the accuracy of the tax debt. For example, if the IRS made an error in calculating the tax liability, the taxpayer may qualify for this type of offer.
- Effective Tax Administration: This option is available when paying the full tax debt would not be fair or equitable due to exceptional circumstances, such as a serious illness or disability.
Eligibility for an Offer in Compromise
To qualify for an OIC, taxpayers must meet several criteria as below.
- File all required tax returns and make all required estimated tax payments.
- Not be in an open bankruptcy proceeding.
- Have a valid extension for a current year return (if applying for the current year).
- Employers must have made tax deposits for the current and past two quarters before applying.
Taxpayers can use the IRS pre-qualifier tool to find out if they are eligible.
How to apply for an Offer in Compromise?
The OIC process can be complex and time-consuming, but with the help of a tax professional, it can be navigated successfully. Here’s an overview of the steps involved:
- Determine Eligibility: A tax professional can help you assess whether you qualify for an OIC based on your financial situation.
- Complete the Application: The OIC application requires detailed financial information, including various forms such as Form 433-A (OIC) for individuals or Form 433-B (OIC) for businesses. Accuracy is critical, as errors can lead to rejection.
- Submit the Offer: Along with the application, you must submit a non-refundable application fee of $205 and an initial payment toward your offer. To calculate an initial offer amount, you will need to gather information about your financial situation, including cash, investments, available credit, assets, income, and debt. A tax professional can extend their hands in estimating the initial payment offer.
- IRS Review: The IRS will review your application, request additional documentation if needed, and make a determination. This process can take several months.
- Acceptance or Rejection: If your offer is accepted, you must comply with the terms of the agreement, which may include making payments over time. If your offer is rejected, you may appeal the decision or explore other tax resolution options.
Make a copy of your application package (all the forms you have filled) and keep it for your records. Mail the completed application package to the appropriate IRS facility mentioned in this booklet.
Payment Options for OIC
You can pay your offer amount in two ways, either a lump-sum payment or a series of periodic payments. Your initial payment varies depending on your offer and the payment method you choose.
- Lump-sum Payment: With this option, you must make an initial payment of 20% of the total amount with your application and then pay the remaining balance in no more than five payments. You will have up to five months to pay the whole amount after your OIC is accepted.
- Periodic Payment: In the periodic payment method, you can make an initial payment with your offer and then continue to pay the remaining amount in monthly installments until it is paid in full.
If you meet the low-income certification requirements which is mentioned in Form 656, Section 1, you do not need to make an initial payment. Furthermore, if you select the periodic payment option, you must continue to make monthly payments while the IRS reviews your OIC application.
How a Tax Professional Can Help
Navigating the Offer in Compromise process can be challenging, especially for those unfamiliar with IRS procedures and requirements. A tax professional can provide invaluable assistance by:
- Evaluating Your Financial Situation: A tax professional can help you determine whether an OIC is the right solution for your tax debt.
- Preparing Your Application: Ensuring that your application is complete, accurate, and supported by the necessary documentation is critical to success.
- Negotiating with the IRS: Tax professionals have experience communicating with the IRS and can advocate on your behalf to achieve the best possible outcome.
- Exploring Alternatives: If an OIC is not the right option, a tax professional can help you explore other solutions, such as installment agreements, penalty abatement, or currently not collectible status.
If the IRS accepts your OIC, you must pay the offered sum and follow all other requirements of the agreement. This includes filing your future tax returns and paying any taxes owed on schedule during the next five years. If your OIC is rejected by the IRS, you have 30 days to file an appeal. You can request an appeal by submitting Form 13711 or a separate letter.
If you’re not sure about the OIC option, speak with a tax professional who can explain the implications of making an offer. IRS Audit Group is the best in the business, tailored to your specific scenario, and will handle all your tax concerns from start to end.
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