OFFER IN COMPROMISE: A GUIDE TO SETTLING YOUR TAX DEBT

Offer in Compromise: A Guide to Settling Your Tax Debt

Offer in Compromise: A Guide to Settling Your Tax Debt

Blog Article

An Offer in Compromise (OIC) is a program offered by the IRS that allows eligible taxpayers to settle their tax liabilities for less than the total amount owed. This option can be a lifeline for individuals and businesses facing significant financial hardship, providing an opportunity to resolve tax debts and move forward without the burden of unpaid taxes. Understanding how the OIC program works, its eligibility requirements, and how to apply can help you determine if it’s the right solution for your financial situation.

What is an Offer in Compromise?

An Offer in Compromise is a settlement agreement between a taxpayer and the IRS that allows the taxpayer to pay a reduced amount to settle their tax debt. The IRS considers this option when it determines that the full amount owed cannot be collected or that accepting a lower amount is in the best interest of both the taxpayer and the government. The OIC program is designed to provide relief for taxpayers who are unable to pay their full tax liability due to financial constraints or other significant challenges.

Eligibility Requirements

To qualify for an Offer in Compromise, you must meet specific eligibility criteria:


  1. Insolvency: You must demonstrate that you are unable to pay your tax debt in full and that paying the full amount would create significant financial hardship. The IRS will assess your financial situation, including income, expenses, assets, and liabilities.

  2. Compliance: You must be in compliance with all tax filing requirements and have made all required estimated tax payments for the current year. This means you need to have filed all your tax returns and paid any taxes due for the current tax year.

  3. Settlement Terms: You must offer a reasonable amount to settle the debt, based on the IRS’s calculation of your ability to pay. The amount you offer should reflect your financial situation and the maximum the IRS can reasonably collect.


Types of Offers

The IRS accepts Offers in Compromise under two primary types:

  1. Doubt as to Collectibility: This type of offer is made when the taxpayer believes they cannot pay the full amount of tax owed. The offer amount is based on the taxpayer’s financial situation and what the IRS can reasonably expect to collect.

  2. Doubt as to Liability: This type of offer is made when the taxpayer disputes the amount of tax owed, believing that the IRS’s claim is incorrect. This type of offer is less common and involves providing evidence to support your claim that the tax liability is inaccurate.


How to Apply for an Offer in Compromise

Applying for an Offer in Compromise involves several steps:

  1. Determine Eligibility: Before applying, assess whether you meet the eligibility criteria for the program. Use the IRS’s pre-qualification tool or consult a tax professional for guidance.

  2. Prepare Financial Documentation: Gather comprehensive financial information, including income, expenses, assets, and liabilities. This documentation is crucial for the IRS to evaluate your offer and determine your ability to pay.

  3. Complete Form 656: Submit IRS Form 656, “Offer in Compromise,” along with Form 433-A (OIC) or Form 433-B (OIC), which provide detailed information about your financial situation. Ensure that all forms are completed accurately and thoroughly.

  4. Pay the Application Fee: Pay the required application fee, unless you qualify for a fee waiver based on your income level or financial hardship. The fee is typically $205, though it can be subject to change.

  5. Submit Your Offer: Send your completed forms, financial documentation, and application fee to the IRS address specified in the instructions for Form 656. Keep copies of all documents for your records.


Review and Decision

Once the IRS receives your Offer in Compromise, they will review your application and financial information. The review process can take several months. During this time, the IRS may request additional information or clarification. It’s essential to respond promptly to any requests to avoid delays.

Benefits and Considerations

Benefits:

  • Debt Reduction: An OIC can significantly reduce the amount of tax debt you owe.

  • Financial Relief: Settling your tax debt for less can alleviate financial stress and improve your overall financial situation.


Considerations:

  • Impact on Credit: An OIC may affect your credit score, as it involves settling debts for less than the full amount owed.

  • Potential Rejection: The IRS may reject your offer if it does not meet their criteria or if they believe you can pay more.


Conclusion

An Offer in Compromise can be a valuable option for resolving tax debt when paying in full is not feasible. By understanding the eligibility requirements, preparing accurate financial documentation, and following the application process, you can increase your chances of successfully settling your tax liabilities. Consulting with a tax professional can provide additional guidance and support throughout the process, ensuring that you make informed decisions and achieve the best possible outcome.

Bottom of Form

 

Report this page