IRS Offers in Compromise: What You Need to Know

It may seem that there are few ways to settle your debts. Sometimes… not enough. However, it is not about using all your options, but about using the best one. It could be possible to negotiate your debts for a large discount. This can be done with an Offer in Compromise, also known as an ‘OIC’ or ‘offer.’ You have to qualify for this. The IRS has been known to accept as little as 1% of the debts owed on a tax bill. Here’s how to know if you qualify for consideration. You must show the IRS that one of the following conditions exists.

  • There is some doubt as to whether the IRS can collect the tax bill from you, now or in the future. This is called “doubt as to collectability.”
  • Due to outstanding circumstances, payment of your full tax bill would cause an ‘economic hardship’ or would be ‘inequitable’ or ‘unfair.’

Taxpayers who want to file a ‘doubt as to liability’ offer must file Form 656-L. This is based on a claim that there is doubt as to whether or not the assessed tax liability is correct. This is more difficult to pursue. The IRS recommends you use the online pre-qualifier tool to help you determine whether you are eligible to make an offer in compromise.

The Process

Submitting an offer to the IRS is a formal process. You cannot just call the IRS and explain to them the deal you want. You have to start by completing IRS Form 656, Offer in Compromise. There is a filing fee for the application of $150. You may be exempt if your monthly income is below the poverty guidelines.

If you’re offering to pay in five payments or fewer within five months or less, you have to send in a minimum of 20% of the offer along with your application. If you are going to take longer than five months to pay, you must pay the first installment along with your offer, and must continue to make all proposed payments while the offer is still pending. All of these payments are nonrefundable, including the application fee, but will go toward the unpaid tax liability (except the application fee).

In addition, you must submit a Collection Information Statement (Form 433-A.) If you are married, the IRS may request that your statement include data on your spouse, even if you alone owe money to the IRS. However, pay close attention when you fill out this form. The IRS looks very closely and scrutinizes the disclosures you make in this form.

The Downside

This is a long process. The forms are just the beginning. After that, the IRS will ask for financial documentation, as in pay stubs, bank records, vehicle registrations, and other items. This is a time-consuming process for taxpayers.

Also, if your OIC is rejected, the disclosures you made about your assets give the IRS all the information it needs to heighten their collection efforts against you. Therefore, it does not make sense to submit an offer in compromise to the IRS unless it is likely to be accepted.

How Much to Offer?

According to the IRS, the amount must be equal to the “realizable value” of your assets plus the amount of money the IRS could take from your future income. The IRS will help to determine a preliminary offer amount online, with the offer in compromise tool.

Keep in mind, even if your offer is rejected, keep trying. The IRS will give you a written explanation if your offer is not accepted. Usually, the IRS rejects offers in compromise for two reasons. One, being the offer is too low; and two, you have been convicted of a serious crime.

This is a great solution to your tax problems, providing much benefit and relief. If you think this is a good solution for you, give us a call or send us an email here.