Are you drowning in tax debt and can’t repay what you owe? An Offer in Compromise (OIC) is a remedy available through the Internal Revenue Service (IRS) to help resolve unpaid tax liabilities. However, it can be challenging to get approved.
This guide breaks down how they work, acceptance rates, qualification criteria, tips for getting approved, and what to do if you need assistance with your request.
What is an Offer in Compromise (OIC)?
An Offer in Compromise (OIC) refers to a settlement agreement between a taxpayer and the IRS. Under this arrangement, the taxpayer can pay a fraction of what they owe to settle their unpaid federal tax debt with the IRS.
Taxpayers could be eligible for an OIC on three premises:
- Doubt as to Collectibility: Your income and assets are insufficient and prevent you from repaying what you owe within the statutory period.
- Doubt as to Liability: You have a legitimate reason to believe you don’t owe the assessed tax liability. The IRS could deem you eligible for an OIC if the tax code was misinterpreted by the tax examiner and the assessed liability is incorrect. You could also qualify if you have evidence to counter the tax examiner’s claim or the tax examiner failed to assess the evidence you presented.
- Exceptional Circumstances (Effective Tax Administration): This claim is available to taxpayers dealing with an extenuating circumstance. The burden of proof is on the taxpayer to demonstrate that paying tax debt would be unfair, inequitable, or cause severe financial hardship.
How the IRS Decides to Accept an Offer in Compromise
When you apply for an OIC, the IRS will review your file to ensure you submit the required documentation. If so, they will analyze your income, expenses, asset equity, and ability to pay your outstanding tax debt.
The evaluation of your profile must give the IRS a reason to believe that you’re dealing with a financial hardship and the proposed settlement amount is reasonable.
What is the Acceptance Rate of an Offer in Compromise?
Before the coronavirus crisis, the acceptance rate for OICs was meager. However, the IRS has recently communicated its intention to accept more OICs post-COVID to help distressed taxpayers find relief.
Do You Qualify for an Offer in Compromise?
You could qualify for an OIC if you:
- Have filed all legally required tax returns
- Are current on mandatory estimated payments for the current tax year
- Are in receipt of a bill related to one or more tax debts you plan to include in your OIC
- Are not actively involved in bankruptcy proceedings
Business owners could also be eligible for an OIC, but all federal tax deposits for the current quarter must be made.
How to Submit an Offer In Compromise Application to the IRS
Here’s a step-by-step breakdown of how to submit an OIC application to the IRS:
- Step 1: Gather any relevant financial data.
- Step 2: Complete Form 433-A Collection Information Statement for Wage Earners and Self-Employed Individuals and attach the required documentation (if applicable).
- Step 3: Complete Form 433-B Collection Information Statement for Businesses and attach the required documentation (if applicable).
- Step 4: Complete Form 656 (Offer in Compromise).
- Step 5: Send the $205 application fee and your initial payment to the IRS through the EFTPS or by mail. (You could be eligible for an application fee waiver if you meet the Low-Income Certification guidelines).
- Step 6: Make copies of the tax forms and supporting documents.
- Step 7: Submit the original documents to the IRS.
You want to offer a reasonable amount to the IRS to have the best chance at getting approved. IRS Form 656 can help you come up with a figure.
Also, keep in mind that your first payment should be based on one of the following options:
- Lump-Sum Cash Offer: 20 percent of the proposed settlement amount. If you choose this option and the IRS accepts your OIC, you should be prepared to pay the remaining balance in five or fewer payments.
- Periodic Payment Offer: the first monthly payment for the same amount of proposed subsequent monthly payments until the tax debt is paid off
Tips for Getting an Offer in Compromise Approved
Although the acceptance rate for OICs is relatively low, there are actions you can take to possibly increase your chances of success. Here are some additional tips to help get your OIC approved:
- Review your application to ensure math errors and blank spaces aren’t present
- Propose a realistic settlement offer
- Stay current on your tax return filings (and file all past-due tax returns)
- Refrain from accumulating additional tax debt during the OIC review process
- Be diligent and file an appeal if your initial request is denied
- Hire a tax professional that has a proven track-record with OICs
- Complete the forms accurately and remit the required application fee and initial non-refundable payment
Still no luck? You can file an appeal by submitting Form 13711 (Request for Appeal of Offer in Compromise). When you submit this document, the IRS could reconsider your initial request.
Get Professional Help With Your Offer In Compromise
The OIC application process can be confusing, overwhelming and lengthy. The average duration of a successful OIC process is 6-12 months. The IRS can turn down OIC’s for reasons including age, level of education, earning potential, past earnings, pending lawsuits, inheritances, and even potential realization of death benefits. Even worse, the IRS could retroactively reject your application for up to 5 years after the acceptance of it.
You can save yourself the headache by enlisting a tax relief firm to lend a helping hand. Their tax resolution specialists could help you create a winning proposal or move forward with an appeal if your OIC application is denied.