If you are a taxpayer finding yourself unable to meet your full tax liability, or believe doing so will cause a financial hardship, filing an Offer in Compromise (OIC) with the IRS may be an option. However, before filing an OIC, it’s important to know what it is, how the process works, and if you qualify.
What is an OIC?
In simplest terms, an OIC is an agreement between a taxpayer and the IRS that settles their tax liability for less than the full amount owed. Though we would all love to have less tax liability, very few taxpayers qualify. The approval of an OIC is based on the IRS’s determination as to whether they can reasonably expect to collect in full, either as a lump sum or through a payment agreement.
When the IRS calculates a taxpayer’s reasonable collection potential, they examine one year’s future income for offers paid in five months, and two years future income for offers paid in 6 to 24 months. All offers must be paid in full within 24 months of acceptance. A taxpayer should be aware of all IRS payment options before considering an OIC.
It bears mentioning that there is no legal right to have a tax debt reduced, it’s up to the discretion of the IRS. Currently only about 25% of OICs submitted were accepted by the IRS. You do have the right to take a rejection to the IRS Appeals Board.
Who Qualifies For an OIC?
Before filing an OIC, a taxpayer should determine if they qualify. There are several conditions that must be met before a taxpayer is qualified to have an OIC considered by the IRS. The IRS must establish that there is some doubt as to whether they can collect, this is called doubt as to collectibility, or that collection would create undue financial hardship. In order to qualify, a taxpayer must also be current with all filing and payment requirements, and cannot be in open bankruptcy proceedings.
Taxpayers can use the IRS’s online Offer in Compromise Pre-Qualifier(link is external) to determine eligibility.
How Does The Process Work
The process for submitting an OIC begins with completing IRS form 656, Offer in Compromise. Form 656 must be mailed with an application fee of $150 attached. In addition to form 656, a Collection Information Statement (form 433-A) must be submitted. If married, the IRS may also request your spouse’s data be included on form 433-A. Be warned, this is only the first step in a long, complex, and arduous process. Due to the difficulty of having an OIC considered, we strongly recommend consulting a tax advisor before filing.
Why Seek Help?
After all necessary forms are submitted, the IRS will request a multitude of financial documentation, everything from pay stubs to vehicle registrations will be expected. This often results in taxpayers submitting box loads of records for the IRS to review, any overlooked (or lost) documents can result in rejection of an offer.
If an OIC is rejected, any information given by the IRS can be utilized to ramp up it’s collection efforts against a taxpayer. In addition, interest continues on the full tax debt throughout the review process. It’s because of these factors (coupled with the IRS’s 75% rejection rate) that it makes sense for a taxpayer to be certain of acceptance before submitting an OIC.
Whether you choose Minyard or another firm, a CPA can establish your likelihood of IRS acceptance, before investing the considerable time and cost of an OIC review. Once establishing a reasonable certainty of success, a CPA will then help to determine an amount to offer, file all forms, and ensure all supporting documentation is properly submitted. In short, a tax professional can be the difference between IRS acceptance and the nightmare of a rejected OIC.
If you’re a taxpayer finding yourself in trouble with the IRS, please contact us. We can analyze your situation, and help determine if an OIC is your best course of action.