An Offer in Compromise (OIC) allows you to settle your tax debt for less than the full amount owed. While qualifying can be challenging, it’s worth exploring if paying your total tax liability is beyond your means or if you believe the debt amount is incorrect. Curious about the qualifications for an OIC? Let’s break down the key criteria you need to meet.
The IRS evaluates three main scenarios when considering an OIC. To qualify, you must meet the general eligibility requirements and the specific conditions tied to the type of program you’re applying for. If you think this option might be right for you, understanding these qualifications is your first step toward reducing your tax bill.
It’s also a good idea to consult tax professionals like Tax Resolution Services of Hawaii, who can guide you through the process and help you determine if an OIC is the best solution for your situation.
How to Pre-Qualify for an IRS Offer in Compromise
Are you struggling with tax debt and considering an IRS offer in compromise (OIC) to settle for less than you owe? Before applying, you must meet certain basic criteria. Here’s how to determine if you pre-qualify for this program.
The Five Key Pre-Qualifier Questions
To apply for an OIC, you must be able to answer “yes” to all the following questions:
- Are Your Tax Returns Up to Date?
The IRS requires that all your tax returns are up to date before considering your application. - Have You Received a Tax Liability Bill?
You can only apply for an OIC if the IRS has officially billed you for the tax debt you’re trying to settle. - Are You Current on Your Estimated Tax Payments for This Year?
Staying current with your estimated payments shows the IRS you’re serious about resolving your debt. - If You’re an Employer, Have You Made All Federal Tax Deposits for the Last Three Quarters?
Businesses must stay compliant with payroll tax obligations to remain eligible for this program.
- Do You Qualify for One of the IRS OIC Programs?
There are three primary programs: Doubt as to Liability, Doubt as to Collectibility, and Effective Tax Administration. Make sure you qualify for one of these.
What If You Answered “No”?
If you couldn’t answer “yes” to all five questions, don’t panic. Instead, take steps to meet these requirements. For example:
- File any missing tax returns as soon as possible.
- Pay your estimated taxes to get current for the year.
- Correct any payroll tax issues if you’re an employer.
Additionally, note that you cannot apply for an offer in compromise if you’re currently in an open bankruptcy proceeding.
Steps to Take If You Don’t Meet the Pre-Qualification Criteria for an Offer in Compromise
Even if you initially answered “no” to the pre-qualification questions, don’t lose hope. It’s still a good idea to consult a tax professional. These experts can evaluate your situation and help you understand the steps needed to meet the pre-qualification criteria for an Offer in Compromise (OIC). They’ll also walk you through the entire application process and explore whether other IRS programs might be a better fit for your needs.
For example, if you haven’t filed all your tax returns, a tax professional can help you get caught up. Once that’s done, you’ll be in a better position to begin the OIC paperwork. If you’re behind on estimated tax payments or federal deposits, they’ll guide you on how to fulfill these obligations before applying.
Additionally, it’s important to wait until you’ve received an official bill for the tax debt you owe. This typically applies to those with unfiled returns or newly filed returns for the tax period in question. If you suspect your tax bill was lost in the mail, a tax professional can contact the IRS on your behalf to verify the amount. Alternatively, you can set up an online IRS account to check your tax debt directly.
Let’s dive into the specifics of the various IRS Offer in Compromise programs and what they require. While each program comes with its own unique (and sometimes tricky) name, the underlying concepts are straightforward and actionable. Understanding these details can make a significant difference when choosing the right option for your situation.
1. How to Qualify for the IRS OIC Program: Doubt as to Collectibility
If you’re struggling with tax debt, the IRS may offer a way to reduce what you owe through a program called “Doubt as to Collectibility.” This offer applies when the IRS believes it won’t be able to collect the full amount of your tax debt. In such cases, they may agree to accept less than the total owed, giving you a break on your tax liability.
But how does the IRS determine who qualifies? The process starts with a close review of your financial situation. The IRS wants to know if it’s realistic to expect full repayment. When you apply, you’ll need to provide a detailed breakdown of your finances—everything from your income and expenses to your debts (including state taxes) and the value of your assets.
You’ll also need to propose a payment amount. After reviewing your application (Form 656-B), an IRS agent will decide if your offer aligns with your “reasonable collection potential.” It’s essential to be thorough and accurate, as the IRS will only accept offers that reflect what it believes it can realistically collect from you.
Navigating this process can be complex. It’s highly recommended to seek professional help to ensure your application is complete and properly presented. A tax professional can guide you through the paperwork, ensuring that your offer has the best chance of approval.
How the IRS Evaluates Your Eligibility for a Tax Debt Settlement
When reviewing your eligibility for a tax debt settlement, the IRS uses specific criteria to assess your financial situation. Here are the three key questions the IRS considers. If your answers to these are “no,” your chances of approval improve significantly.
- Can the IRS collect more through enforced actions than by accepting your offer?
The IRS evaluates whether agreeing to your settlement is the best option for them. If they believe forced collections (like wage garnishments or asset seizures) would recover more than your offer, they’re unlikely to accept it. - Is your financial situation likely to improve in the future?
If the IRS sees a possibility of collecting the full debt in the coming years due to potential improvements in your income or assets, they may reject your offer. - Would the offer seem unreasonable to others?
The IRS ensures that any accepted settlement is fair and appropriate. Offers that appear excessively low or unrealistic are typically denied.
If you answered “yes” to any of these questions, you might not qualify for an offer in compromise. However, that doesn’t mean there’s no hope. The IRS offers other settlement programs that may suit your situation better. Before proceeding, it’s essential to evaluate your collection potential and seek professional assistance to navigate these options effectively.
Understanding and meeting the IRS’s strict requirements can be overwhelming. Consulting with a tax professional is highly recommended. They can help analyze your unique financial circumstances, identify the best settlement program for you, and improve your chances of success.
Reasonable Collection Potential (RCP) and Its Impact on Your Tax Offer
Your Reasonable Collection Potential (RCP) is the total amount the IRS believes it could collect from you if it used all available collection methods. This includes actions like garnishing your wages or selling your assets. So, how much could the IRS get if they did this? Would it be nothing, $10,000, or $100,000? That’s your collection potential, and it’s the number the IRS expects to see when you submit an offer.
How the IRS Calculates Your RCP
When you submit an Offer in Compromise (OIC), the IRS has a specific process for determining your RCP. The OIC application will guide you through the necessary calculations, so it’s essential to follow the steps carefully. The IRS uses forms 433-A (OIC) for individuals and 433-B (OIC) for businesses to evaluate your financial situation.
For both individuals and businesses, the IRS begins by calculating a percentage of the equity in your assets. Then, they will add up your monthly income and living expenses. The difference is called your disposable income, and this will be a key part of your offer.
What to Include in Your Offer Based on Your Disposable Income
When settling your tax debt in a single lump sum, your offer should reflect 12 months’ worth of your disposable income.If you want to pay over a 24-month period, you’ll need to include 24 months of disposable income in your offer.
If your calculations show you can afford to pay the full tax liability, you likely won’t qualify for an OIC. Instead, the IRS will probably require you to set up a payment plan.
What to Do if You Can’t Afford the Full Payment
In some situations, it may be unfair for the IRS to demand you pay the full amount. Or, you may need to settle for less than your RCP. In these cases, while you might not qualify for an OIC based on doubt as to collectibility, you could still be eligible for a different program, such as Effective Tax Administration.
Seek Professional Help for Your OIC Application
Navigating the OIC process and understanding how the IRS calculates your RCP can be complicated. It’s advisable to seek professional help from tax experts who specialize in this area to ensure your offer is submitted correctly and stands the best chance of approval. A tax professional can help you understand your options and guide you through the paperwork, ensuring that you are not overwhelmed by the process.
2. How to Qualify for Effective Tax Administration
If the IRS determines that paying your taxes would lead to financial hardship, you may qualify for an Offer in Compromise (OIC) under the Effective Tax Administration (ETA) category. This also applies if paying the taxes owed would be considered unjust. However, to qualify, you must meet basic eligibility criteria, including staying current on your tax return filings, paying quarterly estimated taxes, and, if you are an employer, making federal tax deposits.
Applying for this program involves using the same application process as for an OIC based on doubt as to Collectibility. However, you must also clearly explain why your offer should be lower than your reasonable collection potential (RCP). The details you provide will depend on your unique situation, making it crucial to have a tax professional by your side. A skilled tax expert can help tailor your application and ensure it meets the IRS’s expectations, improving your chances of approval.
Example of Effective Tax Administration (ETA)
Consider this example: Your RCP is calculated based on the equity in your home, but you rely on a fixed income. Selling your home to pay the taxes would leave you unable to afford rent or cover essential living expenses in your area. In this scenario, asking you to sell your home would be unreasonable and cause economic hardship. Situations like this might qualify for the ETA program. However, it’s essential to note that this is only an example and does not guarantee IRS approval.
To navigate this complex process, seeking professional assistance is highly recommended. Tax professionals have the expertise to present your case effectively and help you achieve the best possible outcome.
3.How to Qualify for an OIC Due to Doubt as to Liability
The Offer in Compromise (OIC) based on “Doubt as to Liability” applies when there’s reasonable uncertainty about whether your tax bill is accurate. Unlike other OIC programs, qualifying here doesn’t require you to prove financial hardship. Instead, you must show evidence that you don’t actually owe the amount the IRS claims.
A tax bill may be incorrect for several reasons. Perhaps a tax assessor made an error, or an audit examiner dismissed valid documents. In some cases, new evidence may emerge showing that your tax liability is lower than originally determined. These situations can qualify you for this program.
Steps to Qualify
To be eligible, you must first ensure that all your tax filings and payments are up to date. This is a standard requirement for any OIC program. Next, you’ll need to complete Form 656-L, specifically designed for this type of OIC. Note that this form differs from the ones used for other OIC programs.
Given the complexity of these processes, seeking professional guidance is highly recommended. A tax expert can help review your case, ensure all necessary documentation is prepared, and improve your chances of a successful outcome. Don’t hesitate to consult a professional to make the most of this opportunity.
Other Eligibility Requirements for an Offer in Compromise
If you meet the basic qualifications and fall into one of the three eligible categories, you might be able to settle your tax debt with an IRS Offer in Compromise (OIC). However, a few additional rules apply to make sure you’re eligible:
- Bankruptcy Status: You cannot be in an active bankruptcy case.
- Tax Returns: All required federal tax returns must be filed before applying.
- For Businesses: If you’re applying on behalf of a business, you must have made all required federal tax deposits for the current and previous two quarters.
- For Individuals: Sole proprietors, self-employed individuals, and partners must have paid all estimated quarterly taxes for the current year.
- Paperwork: You need to complete and submit all required forms, such as Form 656-B or 656-L, along with supporting forms like 433-A or 433-B.
- Supporting Documents: Any documents requested as part of the application must be included.
- Application Fee: A $205 application fee is required (as of Jan 2024), unless you qualify for low-income certification. To meet this, your income must be at or below 250% of the federal poverty level. Your adjusted gross income on your last tax return or monthly income listed in your OIC application will determine this.
- Initial Payment: You must include the initial payment based on the type of offer you choose, unless you’re considered low-income or applying under “doubt as to liability.”
Navigating these rules can be overwhelming, and even small mistakes could delay your application or lead to rejection. It’s always a good idea to work with a tax professional or an experienced financial advisor to ensure everything is handled correctly. Their expertise can help you avoid unnecessary complications and give you the best chance of success with your Offer in Compromise.
The IRS Simplifies Offer in Compromise Requirements
In 2012, the IRS made significant changes to the Offer in Compromise (OIC) program under the Fresh Start Initiative. These updates revamped how the IRS calculates future income, making it easier for many taxpayers to qualify. Now, Lump Sum offers only take into account one year of future income, while Short-Term Periodic offers consider just two years. Additionally, the IRS will now factor in state taxes and student loan payments when calculating monthly living expenses. These adjustments opened the door to more taxpayers seeking relief.
In 2021, the IRS took further steps to improve the process by updating how tax refunds are handled during an OIC application. Previously, taxpayers had to forfeit their refund to qualify for an offer. Now, the IRS will keep your refund and apply it to your outstanding tax debt while your offer is reviewed. However, if you’re facing financial hardship, you may be able to reclaim part or all of your refund. Once your OIC is accepted, you can keep any refund from the tax year in which your offer is accepted.
Understanding Payment Requirements for an Offer in Compromise
Once you’ve grasped the basics of an offer in compromise and have the necessary paperwork ready, it’s time to focus on meeting the payment requirements. These are crucial steps in securing your offer.
If you choose to pay your offer as a lump sum, you’ll need to submit an initial payment of 20% of the total amount along with your application. On the other hand, if you prefer to pay in installments (over a 24-month period), the IRS requires you to make the first month’s payment when you apply. Additionally, while the IRS reviews your offer, you must continue making monthly payments.
Failure to adhere to these payment guidelines could result in the IRS rejecting or returning your offer. However, if you qualify for low-income certification, you’re not required to make any initial payments upfront. Payments only become necessary once the IRS accepts your offer. Similarly, when applying based on “doubt as to liability,” no initial payments are required.
To navigate these requirements effectively and avoid common pitfalls, it’s highly recommended to seek professional assistance. A tax professional can guide you through the process, ensuring that you meet all necessary criteria and deadlines.
Requirements After Your IRS Offer is Accepted: What You Need to Know
Once the IRS accepts your offer, you’re on your way, but there are still important steps to take. If your agreement involves a lump sum payment, you must make the full payment within five months of acceptance. For those with periodic payments, it’s crucial to stay on track with your payment schedule, as the entire offer must be paid off within 24 months or sooner.
Even after your payment is complete, the process isn’t finished. There are ongoing obligations you must meet to ensure that the IRS doesn’t retroactively revoke your offer. Specifically, you need to remain compliant with all tax filing and payment requirements for five years after your offer is accepted. Failing to do so could result in the IRS reversing the offer and demanding full payment of your tax liability.
Because navigating these post-acceptance steps can be complex, it’s highly recommended that you seek professional help to ensure everything is handled properly.
Conclusion
Navigating the IRS Offer in Compromise (OIC) process can feel overwhelming, but understanding the eligibility requirements and preparing a strong application can significantly improve your chances of success. Whether you’re dealing with doubts about collectibility, liability, or effective tax administration, each step requires careful attention to detail and compliance with IRS rules.
Tax Resolution Services of Hawaii specializes in helping taxpayers tackle their IRS challenges, including OIC applications. Our expert guidance ensures that your financial situation is thoroughly evaluated, the paperwork is complete, and your case is presented effectively. If you’re ready to take the next step toward resolving your tax debt, reach out to a trusted tax professional today.
FAQs
What is an Offer in Compromise (OIC)?
An OIC is a program offered by the IRS that allows taxpayers to settle their tax debt for less than the full amount owed if they meet specific eligibility criteria.
How do I know if I qualify for an OIC?
To qualify, you must meet requirements such as having all your tax returns filed, being current on estimated tax payments, and proving financial hardship or uncertainty about the tax liability.
Can I apply for an OIC if I’m in bankruptcy?
No, you cannot apply for an OIC while actively involved in a bankruptcy proceeding.
How much does it cost to apply for an OIC?
The IRS charges a $205 application fee, which may be waived for those qualifying for low-income certification. Initial payments may also be required unless you meet specific exceptions.
What happens if my OIC is rejected?
If the IRS rejects your OIC, you can appeal their decision or explore alternative solutions like installment agreements or penalty abatement programs.
Users Also Say
How do I do an offer in compromise with the IRS? Where do I even start?
User # 1 [Eva N****]
Begin by finding an experienced enrolled agent in your area who specializes in this process. Avoid contacting the companies you see advertised on TV—they often charge exorbitant fees and make unrealistic promises. The cost of having it done will vary based on the specifics of your case. Given how easy it is to make errors on the forms or request the wrong type of relief, it’s best not to go it alone. You can access or download the required packet directly from the IRS website by searching for “OIC.” Keep in mind that a significant amount of documentation is necessary. If you don’t qualify for an OIC, an enrolled agent can help you explore other available options.
User # 2 [B**** Min****]
A great first step would be to hire a knowledgeable attorney with expertise in tax law who is also an Enrolled Agent. This will allow them to handle discussions with the IRS on your behalf. Given the amount you owe in taxes, the cost of hiring such a lawyer will likely be a smart investment, potentially saving you more than their fee.
User # 3 [Bob D****]
Seek out a seasoned professional who isn’t relying on TV ads. The IRS has changed significantly in the last two years, becoming much more aggressive, making these cases harder to handle in your favor.
