Tax Blog / Tips

Offer In Compromise Help

Did you know that you can use something known as an Offer in Compromise to settle your tax debt with the IRS? You can use this Offer in Compromise to retire an outstanding tax debt for less than what you actually owe.

But what, exactly is an Offer in Compromise? An Offer in Compromise—or OIC, for short is a way to settle your irs debt for less than the amount owed.

To figure out whether or not an OIC will be approved, the IRS uses a formula designed to determine whether a tax bill can be settled as charged. Specifically, the IRS does an “investigation” to determine whether the bill can be settled in the full amount, based on the tax payer’s financial situation.

In order to settle the bill in full, the tax payer would need to either pay the IRS a lump sum in full, or promise to pay the IRS eventually, though a formal agreement.

There are 3 main forms that the IRS supplies for filing an offer in compromise. These are form 656,form 433-A and form 433-B. These forms are designed to help taxpayers file for an Offer In Compromise on there own but it’s recommended that you seek a free consultation with a tax attorney, CPA or enrolled agent before doing so as the process for filing an Offer In Compromise can be complicated to say the least.

If through an “investigation” the IRS finds that the tax payer will not be able to follow through with either option, it may entertain an Offer In Compromise. Before entertaining an OIC, though, the IRS will use something it refers to as a “standard” A standard is often also called an indicator of “reasonable collection potential,” or RCP.

An RCP protects the IRS from offers that have been set too low by tax payers. An RCP provides the IRS with a way to determine what it should reasonably be able to expect each tax payer to pay.

This determination is made based upon the financial status of the tax payer in question. Every tax payer interested in applying for an OIC must give the IRS a list of his or her assets and liabilities. This list helps the IRS decide how much the tax payer could afford to pay after taking these three things into consideration:

1. the liquidation of the tax payer’s property

2. the income and savings accounts of the tax payer

3. the amount of revenue available to the tax payer after considering necessary living expenditures

Each OIC is comprised of three “determination options.” These options include:

1. Doubt as to Collectability—the IRS may determine that a tax payer is unable to pay the amount owed in a reasonable amount of time

2.Doubt as to Liability—the IRS may determine that the tax payer is being held responsible for paying more money than is reasonable

3. Effective Tax Administration—the IRS may determine that certain extraordinary circumstances are effecting the tax payer’s ability to pay off his or her debts

Each OIC is further comprised of three distinct payment options. These include:

1.Lump Sum Payment—the IRS requires the tax payer to pay a certain, agreed upon, lump sum within a short period of time

2. Short Term Periodic Payment—the IRS requires the tax payer to pay a reduced amount of money over the period of 24 months

3. Deferred Periodic Payment—the IRS requires the tax payer to pay a reduced amount of money over the duration of the legally authorized collection period.

For complete details on what an Offer In Compromise is and to see if you qualify for an Offer In Compromise visit the IRS website.