Offer in Compromise: Full Guide and Eligibility Overview

Introduction to Offer in Compromise (OIC)

An Offer in Compromise (OIC) is a tax relief program offered by the Internal Revenue Service (IRS) that allows qualified taxpayers to settle their tax liabilities for less than the full amount owed. It's a potential resolution for those facing financial hardship, where paying the full amount would create a financial burden. According to the IRS, the objective is to reach a compromise that suits both parties—one that the taxpayer can handle and also reflects the most the IRS can expect to collect within a reasonable timeframe (IRS Topic No. 204).

Eligibility Criteria

Not every taxpayer qualifies for an OIC. The IRS considers the taxpayer's ability to pay, income, expenses, and asset equity. To be eligible, one must:

• File all required tax returns.
• Make all required estimated tax payments for the current year.
• If a business owner with employees, make all required federal tax deposits for the current quarter.

If you are in bankruptcy, you are not eligible for an OIC. The IRS encourages using their Offer in Compromise Pre-Qualifier tool to assess eligibility.

Calculating Your Offer

The IRS examines several factors when evaluating an OIC application, including:

• Ability to Pay: The IRS reviews your monthly income and expenses to calculate how much you could pay monthly.
• Asset Equity: Any assets you own, like real estate or vehicles, can be used to fund your offer.
• Future Earning Potential: The offer should reflect your current and future income expectations.

It’s crucial to provide comprehensive and accurate information; incomplete or misleading data could lead to a rejection or worse, penalties for fraud.

The Application Process

The OIC application involves several detailed forms and documents:

• Form 656: Offer in Compromise application form.
• Form 433-A (OIC) and 433-B (OIC): Collection information statements for individuals and businesses, respectively.

Your initial application must include an application fee and an initial payment, which are non-refundable (Form 656 PDF).

Processing Time and Payment Options

The typical processing time for an OIC can range from six months to a year, depending on the complexity of your financial situation and the backlog at the IRS.

Once the IRS accepts your offer, you have two main payment options:

• Lump Sum Cash: Pay 20% of your offer amount upfront, with the balance due in five or fewer payments.
• Periodic Payment: Installments over six to 24 months, with the first installment due with the application.

Rejection and Appeals

If your offer is rejected, the IRS will provide a detailed explanation. You have the right to appeal the decision within 30 days of the rejection notice using Form 13711, Request for Appeal of Offer in Compromise (Form 13711 PDF).

It’s advisable to consult a tax professional to strengthen your case by providing any additional supporting documents or correcting discrepancies.

Conclusion

Offer in Compromise provides a viable pathway for taxpayers unable to clear their tax debts in full. Given its complexity, leveraging the IRS Pre-Qualifier tool and consulting with tax professionals can enhance your odds of success. If you're considering an OIC, ensure that all IRS requirements are meticulously followed to avoid setbacks.

Frequently Asked Questions

• What is the IRS Offer in Compromise?

  The IRS Offer in Compromise is a program that allows taxpayers to settle their tax debt for less than what they owe if they meet qualifying conditions.

• How do I know if I'm eligible for an Offer in Compromise?

  Eligibility is based on your ability to pay, income, expenses, and asset equity. Bankruptcy filers are not eligible.

• What forms are required for an OIC application?

  You need to submit Form 656, and either Form 433-A (OIC) for individuals or Form 433-B (OIC) for businesses.

• How does the IRS calculate my offer amount?

  The IRS reviews your income, expenses, and asset equity to determine a suitable settlement amount.

• What happens if my OIC is rejected?

  You can appeal the decision within 30 days using Form 13711 and provide additional supporting information.

• Can I pay my Offer in Compromise in installments?

  Yes, through the periodic payment option, which involves making installments over six to 24 months.

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