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Offer in Compromise (OIC)

An offer in compromise (OIC) is a program offered by the IRS. It allows you to settle your tax debt for less than the full amount you owe. You may qualify for this option if you have no way of paying your back-tax debt or doing so would create a significant financial hardship.

To determine eligibility, the IRS analyzes the taxpayer’s income, expenses and assets. This allows them to see a snapshot of your ability to pay the debt. The IRS accepts offers that they perceive as the most they can reasonably collect on the debt in a practical period of time.

Qualifying for this program may be tricky but rest assured that if an offer in compromise isn’t the right program for you, there are other options. Hire a tax professional to help you gather the necessary documents, construct an offer and present it to the IRS. A licensed and knowledgeable tax professional on your side increases the likelihood of your approval.

Offer in Compromise: The Basics

Make no mistake; the IRS will certainly attempt to collect the full value of the debt you owe. However, they do have a rational understanding that hardships may occur. Consequently, a large tax debt is often insurmountable for some taxpayers.

First, the IRS attempts to achieve a lump-sum payment or reasonable installment agreement to settle the debt. If they can achieve that, that won’t consider the taxpayer’s offer in compromise. Instead, they’ll require full payment. For this reason, taxpayers should take extra caution in their communications with the IRS. The IRS will not hesitate to use your statements for further attempts to collect the whole debt amount.

The Basics of Offer in Compromise

Make no mistake; the IRS will certainly attempt to collect the full value of the debt you owe. However, they do have a rational understanding that hardships may occur. Consequently, a large tax debt is often insurmountable for some taxpayers.

First, the IRS attempts to achieve a lump-sum payment or reasonable installment agreement to settle the debt. If they can achieve that, that won’t consider the taxpayer’s offer in compromise. Instead, they’ll require full payment. For this reason, taxpayers should take extra caution in their communications with the IRS. The IRS will not hesitate to use your statements for further attempts to collect the whole debt amount.

Reasonable Collection Potential

In addition, the IRS expects the taxpayer to make an offer of payment that’s equal to or greater than their “reasonable collection potential.” The reasonable collection potential uses the total value of the taxpayer’s assets to determine if the debt can be paid. This collection potential is then considered in the taxpayer’s eligibility for an offer in compromise.

When Offers in Compromise Are Accepted

The IRS may accept an offer in compromise based on Doubt as to Collectability, Doubt as to Liability and Effective Tax Administration.

Doubt as to Collectability

Doubt as to Collectability indicates that the taxpayer can’t pay their tax debt on their own within a reasonable amount of time. In other words, the IRS concludes that the taxpayer will likely never overcome their tax debt. Therefore, they’re open to an appropriate offer in compromise.

Doubt as to Liability

Doubt as to Liability indicates that the assessed tax debt was likely in error by an IRS agent. For example, a transposed number in data entry may cause an error in assigning liability. Obviously, the IRS won’t hold the taxpayer responsible for a mistake made by one of their agents. However, it does need to be addressed. The most appropriate avenue for doing this is through an offer in compromise.

Effective Tax Administration

Effective Tax Administration allows an offer in compromise, even if the tax assessment is correct and collection of the full amount is possible. In Effective Tax Administration cases, the taxpayer must show the IRS that paying the debt would create an economic hardship or would be unfair and inequitable.

An example of an Effective Tax Administration case is a couple who care for a dependent with a long-term illness. While they may have a savings account with a balance high enough to pay off the tax debt, it would dissolve funds saved to care for the dependent in the future.

Submitting an OIC to the IRS

Requesting an offer in compromise requires that the taxpayer submit a $150 application fee. In addition, he or she should include the proposed initial payment with the application. The IRS offers three options for payment: a lump sum in cash, a short-term periodic payment, and a deferred periodic payment.

Payment Options

Lump Sum: The taxpayer must submit a lump sum to the IRS in no more than five payments once they’ve accepted the offer. The application must include the first payment of at least 20 percent, in addition to the application fee.

Short-term Periodic Payment: Similar to a short-term installment agreement, this extends the terms of payment from five months to 24 months. Each payment is non-refundable, and the application must include the first proposed installment and the application fee.

Deferred Periodic Payment: Choosing this payment option allows the taxpayer to make affordable payments monthly. The IRS collects all payments throughout the remainder of the collectable period in the current statute.

The first proposed installment and the application fee must be included when submitting the application. In addition, the taxpayer should continue making monthly payments during the IRS agent’s consideration of the offer application.

Before filing the application with the fee and proposed first payment, the taxpayer should become thoroughly familiar with the program you’re applying for. The IRS won’t return any payments submitted with an offer. Your proposed initial payment is applied to your debt, regardless of whether the offer is accepted.

Note: The $150 application fee for an offer in compromise is a steep price to pay for some taxpayers. For that reason, we’d like to point out that the fee is non-refundable.

Regardless of whether the offer is accepted, the taxpayer forfeits the fee. It’s designed to cover the cost of an in-depth investigation into your case. Although it’s impossible to determine the IRS’s response to your application, a reputable tax professional can help.

Getting Help with an Offer in Compromise

Submitting an offer in compromise to the IRS is a tempting way to resolve back tax debt. In fact, the thought of settling your debt for less than the total due would probably be quite a relief. By and large, navigating this comprehensive process can be daunting with so much at stake.

Receiving an acceptance of your offer in compromise is sometimes complicated, as well. But with the help of a knowledgeable and reputable tax professional, a determination in your favor is much more likely. At Tax Champions, we strive to achieve the lowest possible tax-debt payment that our clients qualify for.

Free Offer in Compromise Consultation

We invite you to get to know us better and learn more about your case. For that reason, we offer a free consultation with no risk or obligation to hire our firm. We’ll discuss the details of your case and your options, as well as answer your questions. We’ll also discuss our services and how we can help you.

Not only will we communicate and negotiate with the IRS on your behalf, but we’ll complete the appropriate forms and submit them for approval. Our A+ rating at the Better Business Bureau with no complaints can put you at ease.

What’s more, we have no complaints with the IRS nor the Board of Accountancy. Our clients sleep better at night knowing that Tax Champions is protecting them from further tax collection efforts. We’d like to extend the same reassurance to you.

Give us a call today at 800.518.8964.

We’re available to take your call in the evenings and on the weekends, in addition to standard business hours, for your convenience. Finally, if you prefer that we reach out to you, that’s fine too! Just submit your contact information in the blue box on the right side of this screen. One of our friendly and trusted tax experts will be happy to reach out to you.

Sources

[1] Offer in Compromise. (2019, January 17). Retrieved from //www.irs.gov/payments/offer-in-compromise

[2] 4.18.3 Effective Tax Administration Offers. (2017, September 10). Retrieved from //www.irs.gov/irm/part4/irm_04-018-003

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Walter Wotman, CPA

Founder & Managing Partner

Walter Wotman, CPA is the author of "Tax Champions Guide to Tax Resolution." Amazon #1 Best Seller in the Personal Finance category. He is one of America's most experienced tax negotiators with over 35 years of experience helping thousands of clients settle difficult back tax issues.

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