There are many ways to resolve a tax debt. We discussed several of them in previous tips. on this tip, we turn to Offer in Compromise (OIC).
Taxpayers could consider applying for an Offer in Compromise when paying the full tax due could cause financial hardship. An Offer in Compromise is an agreement between a taxpayer and the Internal Revenue Service that settles a taxpayer’s tax liabilities for less than the full amount owed.
Some taxpayers would say “I owe the IRS. I want an offer in compromise.” An Offer in Compromise is not suitable to every taxpayer. Taxpayers should consider other tax resolution options before applying for an Offer in Compromise. According to the IRS, the goal is a compromise that is in the best interest of both the taxpayer and the IRS. Low-income taxpayers do not have to pay the application fee, and they should check if they meet the definition of low-income in the instructions for Form 656.
Taxpayers could apply for one of the 3 types of offers:
- Doubt as to Collectability,
- Doubt as to liability, and
- Effective Tax Administration.
There is a pre-qualifier tool available at irs.gov. In general, the IRS will not accept an offer if the taxpayer can pay the tax debt in full through an installment agreement or equity in assets. If the IRS determines that a taxpayer has not filed all tax returns that are legally required to file, the IRS will apply any initial payment the taxpayer sent with the offer to the tax debt and return both the offer and application fee to the taxpayer. This decision cannot be appealed.
As of April 2023, taxpayers must submit the recent version of OIC Form 656; Form 433-A/B (OIC). These forms are collection information statements required for both individual and business-related offers. Taxpayers must pay the $205 non-refundable application fee and taxpayers must also pay the initial offer payment, if applicable. A taxpayer’s unique facts and circumstances are considered to qualify for an offer in compromise. The Internal Revenue Service will look at the taxpayer’s ability to pay, income, expenses, and asset equity.
How is an offer calculated? The IRS would look for:
- Net Realizable Equity in Assets
- Future Income
- Allowable Expenses
- Allowable Living Expenses
Getting an Offer in Compromise is a long process. There are 7 steps in the Offer in Compromise life cycle:
- Offer Received
- Processability. The Process Examiner (PE) will review if the offer is processable or not.
- Case Building
- Offer in COIC
- Offer in Field Offer in Compromise (FOIC)
- OIC Investigation
- OIC Closure.
In submitting the application, taxpayers should ensure that their documents are current (within 6 months), they accurately value property and assets, they include fees and applicable payments, they stay filing and payment compliant. In most cases, the offer examiner (OE) will contact the taxpayer, in writing, requesting additional information and/or documentation. Taxpayers must promptly respond. When taxpayers do not reply by the deadline, the offer will be returned, and the process will need to restart.
Be mindful that the IRS’s figures could indicate that the taxpayer can fully pay the amount in a lump sum or through a monthly Installment Agreement payment arrangement, and the IRS will state that the taxpayer is not qualified for an OIC.
Fiscal Year 2021 OIC Program Results Dispositions Presented by the Office of Stakeholder Liaison
- Total Dispositions – 46,485 cases
- Not Processable (22%) – 10,089 cases
- Acceptances (32%) – 14,944 cases
- Rejections (17%) – 7,740 cases
- Returns (19%) – 8,747 cases
- Withdrawal/Termination (11%) – 4,965 cases
Hiring a tax resolution expert is the best action a taxpayer could take in a tax matter before the IRS or a state tax authority.
We offer FREE initial consultation!!!