Offer in Compromise (OIC)
How to use an Offer in Compromise to reduce your tax debt.
An offer in compromise allows you to settle your tax debt for less than the full amount you owe. The IRS has recently made new rules that can significantly reduce tax debt and get you a better deal. Offer in Compromise (OIC) may be a legitimate option if you can’t pay your full tax liability, or doing so creates a financial hardship. The IRS will consider your unique set of facts and circumstances:
- Ability to pay;
- Expenses; and
- Asset equity.
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The IRS will generally approve an offer in compromise when the amount offered represents the most they can expect to collect within a reasonable period of time. The offer in compromise program is not for everyone. But if you qualify, having an Enrolled Agent and a team of experienced tax negotiators will help you get the most favorable solution to your tax situation. Please schedule a free consultation and get our team working on a solution for you. We can help you eliminate your tax problems.
Below is a more detailed explanation of how an Offer in Compromise works.
An offer in compromise (OIC) is tax settlement agreement between you and the Internal Revenue Service that resolves your tax liabilities for less than the full amount owed. Absent of special circumstances, an offer will not be accepted if the IRS believes that the liability can be paid in full as a lump sum or through a payment agreement.
In most cases, the IRS will not accept an offer in compromise unless the amount offered by the taxpayer is equal to or greater than the Reasonable Collection Potential (RCP).
The RCP is how the IRS measures the taxpayer’s ability to pay and includes the value that can be realized from the taxpayer’s assets, such as real property, automobiles, bank accounts, and other property. The RCP also includes anticipated future income, less certain amounts allowed for basic living expenses.
You should beware of of any company that makes a claim that tax debts can be settled through the offer in compromise program for “pennies on the dollar.” While an offer in compromise is a settlement for less than you owe, the amount that the IRS will settle for is calculated based on your assets, income, debt and that factored by the amount that the IRS expects it can collect.
Three Types of Offer in Compromises
The IRS may accept an offer in compromise based on three grounds:
Doubt as to Collectibility – Doubt exists that the taxpayer could ever pay the full amount of tax liability owed within the remainder of the statutory period for collection.
Example: A taxpayer owes $20,000 for unpaid tax liabilities and agrees that the tax she owes is correct. The taxpayer’s monthly income does not meet her necessary living expenses. She does not own any real property and does not have the ability to fully pay the liability now or through monthly installment payments.
Doubt as to Liability – A legitimate doubt exists that the assessed tax liability is correct. Possible reasons to submit a doubt as to liability offer include: (1) the examiner made a mistake interpreting the law, (2) the examiner failed to consider the taxpayer’s evidence or (3) the taxpayer has new evidence.
Example: The taxpayer was vice president of a corporation from 2004-2005. In 2006, the corporation accrued unpaid payroll taxes and the taxpayer was assessed a trust fund recovery penalty as a responsible party of the corporation. The taxpayer was no longer a corporate officer and had resigned from the corporation on 12/31/2005. Since the taxpayer had resigned prior to the payroll taxes accruing and was not contacted prior to the assessment, there is legitimate doubt that the assessed tax liability is correct.
Effective Tax Administration – There is no doubt that the tax is correct and there is potential to collect the full amount of the tax owed, but an exceptional circumstance exists that would allow the IRS to consider an offer in compromise. To be eligible for compromise on this basis, a taxpayer must demonstrate that the collection of the tax would create an economic hardship or would be unfair and inequitable.
Example: Mr. & Mrs. Taxpayer have assets sufficient to satisfy the tax liability and provide full time care and assistance to a dependent child, who has a serious long-term illness. It is expected that Mr. and Mrs. Taxpayer will need to use the equity in assets to provide for adequate basic living expenses and medical care for the child. There is no doubt that the tax is correct.
Offer in Compromise Payment Options
In general, a taxpayer must submit a $150 application fee and initial payment along with the Form 656, Offer in Compromise. Taxpayers may choose to pay their offer in compromise in one of three payment options:
Lump Sum Cash Offer – Payable in non-refundable installments, the offer amount must be paid in five or fewer installments upon written notice of acceptance. A non-refundable payment of 20 percent of the offer amount along with the $150 application fee is due upon filing the Form 656.
- If the offer will be paid in 5 or fewer installments in 5 months or less, the offer amount must include the realizable value of assets plus the amount that could be collected over 48 months of payments or the time remaining on the statute, whichever is less.
- If the offer will be paid in 5 or fewer installments in more than 5 months and within 24 months, the offer amount must include the realizable value of assets plus the amount that could be collected over 60 months of payments, or the time remaining on the statute, whichever is less.
- If the offer will be paid in 5 or fewer installments in more than 24 months, the offer amount must include the realizable value of assets plus the amount that could be collected over the time remaining on the statute.
Short Term Periodic Payment Offer – Payable in non-refundable installments; the offer amount must be paid within 24 months of the date the IRS received the offer. The first payment and the $150 application fee are due upon filing the Form 656. Regular payments must be made during the offer investigation. The offer amount must include the realizable value of assets plus the total amount the IRS could collect over 60 months of payments or the remainder of the statutory period for collection, whichever is less.
Deferred Periodic Payment Offer – Payable in non-refundable installments; the offer amount must be paid over the remaining statutory period for collecting the tax. The first payment and the $150 application fee are due upon filing the Form 656. Regular payments must be made during the investigation. The offer amount must include the realizable value of assets plus the total amount the IRS could collect through monthly payments during the remaining life of the statutory period for collection.
The IRS is not bound by either the offer amount or the terms proposed by the taxpayer. The offer in compromise investigator may negotiate a different offer amount and terms, when appropriate. The investigator may determine that the proposed offer amount is too low or the payment terms are too protracted to recommend acceptance. In this situation, the offer in compromise investigator may advise the taxpayer as to what larger amount or different terms would likely be recommended for acceptance.
Payments and Application Fees
When filing an offer in compromise, two separate remittance documents should be sent, one for the application fee and the other for the required offer payment. All payments should be made by check or money order made payable to the United States Treasury. Practitioners who file multiple offer in compromises at the same time should not combine application fees for multiple clients.
The Form 656-PPV, Offer in Compromise Payment Voucher, included in the Form 656, should be completed and attached to any periodic payment(s) that becomes due. Failure to submit any required periodic payments, after the initial payment has been submitted, will result in the offer being declared withdrawn.
The offer in compromise application fee reduces the assessed tax or other amounts due. The application fee will be returned if the offer in compromise is deemed not to be processable. Unless the offer in compromise has been submitted under doubt as to liability or a completed Form 656-A is included with the Form 656, the $150 application fee must be included with the offer or the IRS will return the offer.