What is An Offer in Compromise?
If you owe a significant sum to the Internal Revenue Service but lack the resources to pay the total amount due, the IRS may accept an offer in compromise (OIC) that will let you eliminate your tax debt for less than you owe.
However, for the IRS to accept your OIC you must first show that you are suffering from a genuine financial hardship that prevents you from fully paying your tax bill. The IRS usually rejects OICs submitted by taxpayers who could pay what they owe under an installment agreement or other means.
Who can Benefit from an OIC?
Since most people would prefer to pay a reduced tax bill, the IRS has put rules into place to help ensure it only accepts OICs from taxpayers who couldn’t otherwise pay. That means that you cannot benefit from an OIC unless the offered amount is more than the IRS believes it could otherwise reasonably expect to collect.
The IRS may accept OICs in the following situations:
- It is doubtful the IRS can collect the full amount due based on your income and assets;
- There is a genuine dispute about the amount you owe; or
- Requiring you to pay the total amount would create an economic hardship or be unfair.
Additionally, for the IRS to consider your OIC, you must have filed all of your required federal tax forms and met other requirements.
Beginning in April 2020, the IRS started requiring that taxpayers offering to make a lump-sum payment submit a 20% non-refundable payment along with their offer. If the taxpayer is proposing to make periodic payments, the first installment must be submitted with the offer.
What are the Rules for OICs?
Submitting an OIC to the IRS is a formal process that begins with the filing of a Form 656, Offer in Compromise. You also must attach a $205 application fee to your form. If you cannot afford the application fee, you may request a poverty waiver by submitting the application fee worksheet included with the Form 656.
If you are an individual filing an OIC, you must provide the IRS with a detailed breakdown of your financial situation using a Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals. Businesses must submit their financial information using a Form 433-B.
After it has received your Forms 656 and 433, the IRS will likely ask for additional documentation, such as pay stubs, bank records, and other information to verify your financial situation.
Why are OICs so Effective?
The effectiveness of the IRS’s OIC program is that it benefits both the taxpayer and the government. Taxpayers benefit because they can settle their tax debt for less than they owe. The U.S. government benefits because the IRS can usually secure a larger payment than if it had used other methods to collect.
The IRS provides many additional resources for taxpayers who are considering filing an OIC. These include an IRS OIC pre-qualifier tool that lets taxpayers determine if they meet the basic qualifications for an offer and estimate a payment amount that the IRS will accept. For more information, check out the IRS’s OIC web page.