If you’re facing a significant tax debt and aren’t sure if you can pay it all back, you may have heard of the offer in compromise (OIC). This program offers a way to settle your tax debt by paying only a portion of what you owe, rather than the full amount. While it sounds like a helpful solution, qualifying for an OIC is quite challenging, and only a small number of taxpayers meet the strict criteria.
However, if you do qualify, an OIC could provide much-needed relief from the burden of unpaid taxes. It’s crucial to understand whether this option fits your situation and to seek professional advice to guide you through the process. Taking this step could be the start of resolving your tax debt and reducing financial stress.
What is an offer in compromise?
With an offer in compromise (OIC), the IRS provides an option to settle your tax debt for less than the full amount you owe. If you’ve been searching for tax debt relief, you’ve likely come across companies claiming they can settle your debt for “pennies on the dollar.” While that may sound appealing, it’s important to know that qualifying for an OIC is quite rare, and many people don’t meet the strict criteria.
To be eligible for the program, you need to demonstrate a valid reason for why you can’t pay the full tax liability. When you submit your offer, the IRS reviews the amount and determines whether it’s acceptable. If they believe you can pay more, they may ask you to increase your offer, and failing to do so could lead to a rejection of your application.
If the IRS concludes that you can afford to pay your full tax bill, you might consider requesting an installment agreement. However, if you disagree with their assessment, you can provide additional evidence to support your claim and negotiate a lower amount. In some cases, Fast Track Mediation might be an option to expedite the review process, though it’s only available before receiving a rejection letter.
What does it take to qualify?
To be eligible for an offer in compromise (OIC), there are specific criteria you must meet. The IRS has strict guidelines, and it’s important to ensure you’re in compliance before applying. Getting everything in order can make a big difference in whether your offer is accepted or rejected, so paying attention to these details is key.
Here’s what you’ll need to qualify for an OIC:
- All required tax returns must be filed.
- Any estimated tax payments due must have been made.
- You should not be in the middle of any open bankruptcy proceedings.
- If you’re applying for the current tax year, a valid extension request for this year’s return must be filed.
Making sure you’ve met all these requirements can save you from unnecessary delays or even rejection of your application. If you’re not sure about your status, getting professional guidance can help you confirm your eligibility and increase your chances of success.
What Do You Need to Know About Form 656?
Handling the offer in compromise (OIC) application process can be overwhelming, which is why it’s always a good idea to consult a tax professional. Whether it’s a CPA, tax advisor, Enrolled Agent, or tax attorney, having an expert guide you through the process can greatly improve your chances of success. They can help ensure you meet all the IRS requirements and avoid any common pitfalls along the way.
If you choose to handle the application yourself, you’ll need to complete the IRS Form 656 to apply for an OIC. Here are a few key documents that come with the Form 656 booklet:
- Form 433-A (OIC): Collection Information Statement for Wage Earners and Self-Employed Individuals.
- Form 433-B (OIC): Collection Information Statement for Businesses.
These forms are essential to provide a detailed financial picture that the IRS will review when deciding on your application. While it’s possible to manage this process on your own, seeking professional help can make the process smoother and increase your chances of getting an approval.
Is the Offer in Compromise Pre-Qualifier Right for You?
If you’re thinking about applying for an offer in compromise, the IRS has a helpful online tool called the OIC Pre-Qualifier to see if you may be eligible. This can be a great starting point before diving into the full application process. While the tool doesn’t guarantee approval, it can give you a clear idea of whether you meet the basic qualifications for the program.
Here are some of the key questions the tool will ask to help determine your eligibility:
- Are you currently in an open bankruptcy proceeding?
- Have you filed all required federal tax returns?
- Are all required estimated tax payments made?
- If you’re self-employed with employees, have you submitted all federally required tax deposits?
Keep in mind, if you’re in a partnership, corporation, or living in a foreign country or U.S. territory, you won’t be able to use the OIC Pre-Qualifier. The same applies if you’re military personnel with an APO or FPO address. Make sure you fit the criteria before proceeding with your application.
Why the IRS Might Reject Your OIC Application
Even if you’re not in bankruptcy, have filed all your tax returns, and made your estimated payments, the IRS could still deny your offer in compromise (OIC) application. It can be frustrating, but there are several reasons why this might happen. Understanding these can help you avoid common mistakes and improve your chances of approval.
Here are some key reasons your OIC application might be rejected:
- The tax debt is court-ordered.
- Missing required information in your application.
- You didn’t receive a bill for a tax debt included in your offer.
- Your case has already been forwarded to the Justice Department by the IRS.
- You failed to pay the nonrefundable $205 application fee (this fee is waived for low-income individuals).
If you’re seeking low-income certification to have the fee waived, your adjusted gross income (AGI) from your most recent tax return must meet the criteria in Form 656, Section 1. Your certification also depends on your family size and where you live. Make sure to check these details carefully to avoid any unnecessary setbacks.
How Does the IRS Decide If Your Offer in Compromise Will Be Accepted?
If you meet the pre-qualifications, you may wonder how the IRS calculates whether it will accept your offer in compromise (OIC). The IRS uses your financial details to determine your Reasonable Collection Potential (RCP), which is essentially the amount they believe they can collect now and from your future earnings. This calculation is key in deciding whether your offer will be approved.
The IRS evaluates several factors to determine your RCP, including:
- Your bank accounts
- Real estate holdings
- Motor vehicles
- Current income
- Future income
If the IRS concludes that collecting your full tax debt isn’t realistic, it may accept your offer in compromise. You might also qualify if there’s a legal dispute regarding the tax debt or if paying the full amount would cause economic hardship. In cases where paying the full amount would be considered unfair or inequitable due to exceptional circumstances, the IRS might also approve an OIC.
How Long Will the Process Take for You?
Typically, the offer in compromise (OIC) process can take anywhere from seven to 12 months to complete. During this time, you’re required to make monthly payments to the IRS while they review your application. It can feel like a long process, but understanding the steps involved can help you stay prepared and on track.
Here’s a breakdown of what to expect during the OIC process:
- Monthly payments to the IRS are required while your application is under review.
- The IRS usually makes a decision on your offer within six months of receiving your application.
- The entire process, from submission to final resolution, can take up to a year.
While the timeline may vary depending on your situation, knowing what’s ahead can help ease some of the stress. Staying consistent with your payments and keeping communication open with the IRS can help keep the process moving smoothly.
How Can You Make Payments Through an Offer in Compromise?
When you submit an offer in compromise (OIC), you have two different payment options depending on what works best for your situation. Choosing the right one is important, as it will dictate how you manage your payments while the IRS reviews your offer. Each option comes with specific steps you need to follow.
Here are the two payment options available:
- Lump sum cash – With this option, you send a 20% initial payment along with your application. If the IRS accepts your offer, they will notify you in writing, and you’ll need to pay off the remaining balance in five or fewer payments.
- Periodic payment – For this option, you submit your first payment with the application and continue to make monthly payments while the IRS reviews your offer. If your offer is approved, you keep making those payments until the entire balance is settled.
Whether you opt for the lump sum or periodic payments, it’s essential to stay on top of your payments during the review process. Understanding these options can help you decide which payment method best suits your financial situation and ensures you’re ready to act when the IRS responds.
What Are the Drawbacks of an Offer in Compromise?
Throughout the offer in compromise (OIC) process, the IRS may file a Notice of Federal Tax Lien, which can impact your credit and alert creditors that you owe a tax debt. This public notice could complicate your financial situation and affect your ability to secure loans or credit. It’s important to be aware of how this might impact you as you work through the OIC process.
Here are a few key points to keep in mind about the tax lien:
- The IRS may file a Notice of Federal Tax Lien during the OIC process.
- This public notice informs creditors of your outstanding tax debt.
- The lien will be released once your offer is accepted and the full amount is paid.
In most cases, the IRS won’t file the tax lien until they’ve made a decision on your OIC application. However, understanding the potential for a lien and its effects on your finances can help you stay prepared and avoid surprises during the process.
What happens if you don’t qualify?
For many taxpayers, qualifying for an offer in compromise (OIC) can be a long shot, as the IRS has strict guidelines and only accepts a small percentage of applicants. However, if your offer is rejected, you don’t have to give up. You have the right to appeal the decision and take steps to have your case reconsidered.
Here’s what you need to do if your offer is denied:
- File Form 13711, Request for Appeal of Offer in Compromise.
- Ensure that the form is submitted within 30 days of receiving the rejection notice.
Taking this step can give you another chance to make your case and potentially get a more favorable outcome. If you believe your financial situation wasn’t accurately represented or you have new information to provide, filing an appeal can help keep the process moving forward.
Conclusion
Even if you don’t qualify for the IRS offer in compromise (OIC) program, don’t worry—there are still other options to help relieve your tax debt. The IRS offers several tax relief programs, and it’s important to find the one that best fits your situation. You don’t have to face this alone.
If you’re dealing with tax issues, Bench’s tax advisory services can provide the guidance you need. With a network of enrolled agents and tax professionals, we’re here to help you navigate the OIC application or assist you in setting up an alternative tax payment plan. Plus, Bench can take the critical first step of getting your historical bookkeeping in order, no matter how far behind you may be.
If you’re thinking about applying for an OIC, your next move is to check your eligibility using the IRS pre-qualifying tool. Whether or not you qualify, you’ll be one step closer to managing your tax debt and getting back on track financially. Let’s get your tax situation under control, so you can move forward with confidence.
