The IRS Offer in Compromise (OIC) program allows qualifying taxpayers to settle their tax debts for less than the full amount owed, providing a path toward financial freedom. Yet, the process to get there is far from straightforward. The IRS’s requirements are stringent, the paperwork is complex, and even a single mistake can result in a rejected offer, making the journey seem almost as daunting as the debt itself.
Before diving headfirst into the OIC process, you should familiarize yourself with the ins and outs. The IRS takes this seriously, and so should you. Lack of understanding can result in both financial and emotional turmoil. This blog provides you with a comprehensive understanding of what lies ahead.
Familiarize Yourself with the OIC Program Basics
Embarking on your OIC journey starts with a solid foundation. It’s much like preparing for a long trek; you’ll want a map, a guidebook, and a sense of the terrain before you step out the door.
Visit the IRS’s Official Website (IRS.gov)
Begin by going directly to the IRS’s official website (www.irs.gov), where you’ll find a section dedicated to the OIC program. Here, you’ll encounter information and resources designed to provide you with an overview of what the program entails. Don’t skim through—read the content carefully, as this sets the stage for what’s to come. It’s your first glimpse into the rules, eligibility criteria, and procedures related to OIC.
Download IRS Form 656-B, Offer in Compromise Booklet
The IRS Form 656-B, or “Offer in Compromise Booklet” is essentially your handbook for navigating the OIC process. This document will provide you with in-depth details, ranging from the types of offers available to the forms required for application, as well as step-by-step guidance on how to fill them out. Take the time to read this booklet multiple times. Highlight essential sections, make notes, and perhaps even summarize information in a way that makes it easier for you to refer back to it. This booklet is going to be your close companion throughout the OIC journey, so get well-acquainted with it.
Learn the Types of OICs
Understanding the types of Offers in Compromise is like understanding the different routes you can take on a map. Each route has its own challenges and requirements, but also its unique advantages. There are three primary types of OICs, and you’ll need to figure out which one aligns best with your financial and tax situation.
Doubt as to Collectibility
“Doubt as to Collectibility” is the IRS’s way of acknowledging that they may never be able to collect the full amount of tax owed from you given your financial situation. If you opt for this route, you’re signaling to the IRS that, despite your best intentions, you simply can’t pay off the entire debt—either immediately or over time via installments.
Key Aspects to Consider:
- Financial Analysis: The IRS performs an in-depth financial analysis, known as a Collection Information Statement, which includes scrutinizing your income streams, monthly living expenses, value of assets like home and cars, and even retirement accounts.
- Future Earning Potential: It’s not just about your present circumstances; the IRS also has an eye on the future. If you are likely to earn significantly more in the upcoming years, the IRS will consider this when evaluating your offer.
- Offer Amount: Typically, the IRS will expect an offer that equals the “reasonable collection potential” (RCP), which is a measure of your ability to pay over time. The RCP includes the value of your assets and a calculation based on your future income, usually extending over a year or more.
- Documentation: Be prepared to substantiate your financial status with thorough documentation. This may include pay stubs, bank statements, property assessments, and anything else that paints a full picture of your financial standing.
- Application Fee: This type of OIC usually requires a non-refundable application fee and an initial payment, both of which may differ based on your income levels and the specific terms of your offer.
Applying for an Offer in Compromise under “Doubt as to Collectibility” is a complex but often worthwhile endeavor. The more prepared and transparent you are, the smoother the process will likely be. It’s a bit like a financial x-ray: uncomfortable and revealing, but ultimately very useful for diagnosis and treatment.
Doubt as to Liability
“Doubt as to Liability” is a more specialized type of Offer in Compromise, and it’s a formal way to dispute the amount of tax debt you owe. It’s not for those who simply feel the debt is unjust; you must have substantive grounds to question the legitimacy of the tax liability, almost identical to an IRS audit.
Key Aspects to Consider:
- Legal or Factual Basis: You must have a compelling reason for why the assessed tax debt is incorrect. This could be due to miscalculations, incorrect tax assessments, or application of tax law that you believe is erroneous.
- Evidence: You’ll need to present credible evidence to back up your claim. This could include previous tax returns, amended tax calculations, legal rulings that apply to your situation, or any other documents that challenge the IRS’s claims.
- Written Explanation: Typically, you’ll be expected to provide a written explanation detailing your dispute. This document should be clear, well-organized, and supported by evidence.
- IRS Review: Upon submission, the IRS will review your claim and the accompanying evidence. Unlike “Doubt as to Collectibility,” where your ability to pay is assessed, here the focus is purely on whether the tax liability itself is correct.
- No Initial Payment: Unlike other types of OICs, you generally don’t have to make an initial payment of the tax owed when you’re disputing liability. However, be aware that you may still be responsible for any application fees.
- Expert Advice: Given that this OIC route often involves intricate legal or factual arguments, consulting a tax attorney could be particularly beneficial. They can help you frame your case in a way that’s more likely to be persuasive to the IRS.
- Be Prepared for Scrutiny: Remember, you’re essentially challenging the IRS, an organization that prides itself on thoroughness and accuracy. Expect your evidence and arguments to undergo rigorous review.
Applying for an Offer in Compromise under “Doubt as to Liability” is not something to be undertaken lightly. The burden of proof is on you, and the IRS will expect a well-articulated and substantiated case. However, if you have a genuine dispute and the evidence to back it up, this option can be a viable path to resolving your tax issues.
Effective Tax Administration
The “Effective Tax Administration” option is often seen as a last resort for unique cases that don’t fit neatly into the other two categories. The aim here is to provide relief for taxpayers for whom paying the full amount would either be inequitable or would cause significant financial hardship. This category is less common and often requires substantial documentation and justification.
Key Points to Consider:
- Defining Hardship or Injustice: The IRS has a very specific and stringent understanding of what constitutes “hardship” or “injustice.” It’s not enough to claim that paying your tax debt would be difficult; you have to prove that it would result in severe financial distress or would be unfair for other compelling reasons.
- Document, Document, Document: Be prepared to present an exhaustive array of evidence to support your claim. This could include medical records, financial statements, and detailed explanations of your circumstances. The more information you can provide, the better.
- Life Circumstances: This category often applies to taxpayers who are elderly, seriously ill, or facing other extraordinary life circumstances that impact their financial stability.
- Financial Evaluation: The IRS will still conduct a thorough financial analysis, looking at your income, expenses, assets, and potential future earnings. However, in this category, they’ll also consider other qualitative factors, like age, health, and family circumstances.
- Ethical and Moral Considerations: Occasionally, “Effective Tax Administration” can apply in situations where there’s a moral or ethical reason why collecting the tax would be seen as unjust. However, these cases are extremely rare.
- Expert Guidance: Given the complexity and nuance involved in this type of OIC, consultation with a tax professional is highly advisable. They can help you navigate the intricate requirements and assemble a persuasive case.
- The High Bar: Remember, this category is not a catch-all for anyone who finds paying their taxes inconvenient. The bar for approval is high, and the burden of proof is on you to convincingly demonstrate your eligibility.
Opting for an Offer in Compromise under “Effective Tax Administration” requires meticulous preparation and persuasive justification. If you believe your situation truly warrants this level of consideration, be prepared for a lengthy and rigorous review process. However, for those who meet the criteria, it offers a route to tax relief that might otherwise remain out of reach.
Determine Which Type Works for Your Tax Debt Situation
After acquainting yourself with the three types of Offers in Compromise, the next step is to thoughtfully evaluate which category best aligns with your particular financial circumstances and tax issues. This choice is far from trivial—it’s a pivotal decision that shapes the way the IRS will review and interact with your case. Here are some guidelines to help you in this crucial stage:
Key Factors to Consider:
- Financial Status: If you’re financially strapped and can show that you’re unable to pay off your tax debt, you’re more likely to fit into the “Doubt as to Collectibility” category. A close look at your assets, income, and allowable expenses will be part of this equation.
- Validity of Debt: Are there compelling reasons to believe that the tax amount assessed against you is incorrect? If you have documentation or legal reasons to challenge the amount owed, “Doubt as to Liability” could be your go-to option.
- Special Circumstances: If you find yourself in a unique situation where paying off the tax would lead to unfair or severe financial hardship, “Effective Tax Administration” may be the category for you. However, remember that this is the hardest to qualify for.
- Legal and Financial Expertise: It’s often advisable to consult a tax professional—whether it’s a Certified Public Accountant (CPA), Enrolled Agent (EA), or tax attorney. Their expertise can guide you through the intricate maze of tax laws, forms, and IRS procedures. They can help you decide which type of offer has the highest likelihood of being accepted given your unique circumstances.
- Penalties and Future Compliance: Bear in mind that different types of offers can have different requirements for future tax compliance. Make sure you’re prepared to meet these, or you risk having your offer rescinded.
- Burden of Proof: Lastly, remember that the burden of proof is on you. The IRS assumes that their tax assessment is correct. Whether you’re claiming you can’t pay or arguing that you shouldn’t have to, be prepared to substantiate your case thoroughly.
By methodically assessing your circumstances in light of these factors and perhaps seeking expert advice, you’ll be better positioned to select the OIC category that most accurately reflects your situation. Choosing the right type of OIC is one of the most strategic decisions you’ll make in this process. A correct match can pave the way for a successful compromise, while a poor choice can lead to unnecessary complications.
Familiarize Yourself with the Evaluation Criteria
Understanding how the IRS evaluates Offers in Compromise is pivotal in building a strong case. Knowing what criteria the IRS looks at can provide you invaluable insights into how to present your financial situation in the most accurate and compelling manner. Below are the key aspects that the IRS will consider:
The IRS Will Evaluate Your Eligibility, Ability to Pay, Income, Expenses, and Asset Equity
The IRS employs a multifaceted evaluation approach to determine your ability to pay the tax debt. Here’s a breakdown:
- Ability to Pay: This is an overarching measure that combines your income, expenses, and assets to calculate how much you can feasibly pay.
- Income: The IRS will scrutinize your income sources, be it from employment, a business, or investments. Past income tax returns are often consulted to gauge your earnings stability.
- Expenses: Living expenses, including housing, utilities, food, and transportation, will be analyzed. The IRS has standard allowable expenses that they consider “reasonable.” These are usually subject to national and local Collection Financial Standards.
- Asset Equity: This includes all your tangible assets—like property, vehicles, and valuable items—as well as intangible ones like bank accounts and investments. Equity is calculated as the market value of the asset minus any debts or liens against it. Often a “quick sale” value of 80 percent of market value is used for an OIC calculation.
Review Your Finances to Determine If You Genuinely Cannot Pay the Owed Amount Through other Payment Options
After getting a grasp of what the IRS is looking for, take an honest inventory of your own finances.
- Compile Data: Gather all necessary documents such as pay stubs, bills, bank statements, and asset valuations. The more thorough you are, the better.
- Perform a Self-Assessment: Use this data to conduct an in-depth review of your income, outgoings, and assets. Compare these figures to the IRS’s standard allowances for expenses to see if you genuinely cannot meet the tax obligation.
- Projection: Don’t just look at your current situation; also consider your financial future. Are there impending changes, like a job loss or large expected expenses, that could further affect your ability to pay?
- Consult an Expert for Help: If the numbers make you dizzy or if you’re not confident in your assessment, consult a tax professional. They can help you accurately evaluate your financial standing and how it matches up against the IRS’s criteria.
By the end of this step, you should have a realistic picture of your finances and a solid understanding of how the IRS will assess your case. This will set the stage for determining the best type of offer to submit and how to structure it effectively.
Potential Outcomes of the OIC Process
As you proceed with your Offer in Compromise, you should be prepared for a range of potential outcomes. Each comes with its own set of implications and next steps. Knowing what these are can help you plan ahead and respond more effectively to the IRS’s decision. Here’s a detailed look at these possible scenarios:
Acceptance: IRS Accepts the Offer You Presented
If the IRS accepts your offer, this is obviously the best-case scenario. You will receive a formal letter of acceptance, outlining the terms you must follow to resolve your tax debt. Once you meet all the obligations specified, your remaining debt will be officially cleared.
Rejection: IRS Denies Your Request
If the IRS rejects your offer, it isn’t necessarily the end of the road. You will receive a letter stating the reasons for the denial. You have the option to appeal the decision within 30 days using IRS Form 13711 (Request for Appeal of Offer in Compromise). An appeal may result in a different outcome if you can provide additional information or arguments that address the IRS’s concerns.
Return: Sent Back Due to Missing Information, Fees, or Not Meeting Certain Criteria
A “Return” is not the same as a rejection. Your offer may be returned if it’s incomplete, lacks the necessary fees, or you didn’t meet some basic criteria. In this case, the IRS doesn’t even get to the stage of evaluating the merits of your offer. You will need to resubmit your application after addressing the deficiencies.
Counteroffer: IRS Proposes a Different Compromise Amount
The IRS might counter your initial offer with a different amount that they find acceptable. This could be higher or lower than your initial offer, depending on their evaluation of your financial situation. You’ll have the opportunity to either accept this counteroffer or renegotiate.
Termination: IRS Accepts Your Offer, But Later Terminates it for Noncompliance
Even after acceptance, you must adhere to the terms outlined in the acceptance letter for a specified period (usually five years). Failure to do so may result in the IRS terminating the agreement. In such a case, your original tax debt may be reinstated, and you’ll find yourself back at square one, often with additional penalties and interest.
Understanding these potential outcomes can help you not only prepare for each scenario but also strategize your interactions with the IRS. You’ll be better informed and, as a result, more empowered throughout the Offer in Compromise process.
While the OIC process could significantly reduce your tax burden, you must also be aware of the various consequences—both positive and negative—that could affect you during this period. Knowledge of these potential pitfalls will help you make more informed decisions as you navigate the process.
Protection from Collection Activities But Accruing Penalties and Interest
Navigating the OIC process can be stressful, but one of the temporary reliefs it offers is a pause on most collection activities from the IRS. During the typical one-year evaluation period, you won’t have to worry about waking up to bank levies, property liens, or wage garnishments. This suspension of aggressive collection measures allows you some time to regroup, perhaps consult with tax professionals, and gather the necessary documentation for your case.
However, this is not a complete hiatus from your financial obligations to the IRS. Penalties and interest on the amount you owe continue to accrue during this period. If your OIC application is eventually denied, you’ll find yourself facing a larger debt than you initially had, due to these accruing costs.
It’s a bit like a ticking clock: you’re given time to sort things out, but the longer it takes or if the offer isn’t accepted, the more you’ll owe at the end. Therefore, it’s in your best interest to ensure your application is as thorough and accurate as possible the first time around to expedite the process and minimize additional financial burdens.
Extension of the Collection Statute Expiration Date (CSED)
Submitting an OIC has its implications, and one of the most significant yet often overlooked aspects is the extension of the Collection Statute Expiration Date (CSED). The CSED serves as a statutory “time limit” during which the IRS is legally allowed to collect your tax debt. Typically, this is a 10-year period starting from the date the tax liability was assessed.
When you engage in specific actions like filing an OIC, the clock on the CSED essentially “pauses.” That means the time your OIC is under review does not count towards the original CSED. This extension can be a double-edged sword. On one hand, it gives you the time you need to make a compelling case for your OIC. On the other hand, if your offer is rejected, the IRS will have additional time beyond the original CSED to collect the tax debt.
Given this, the extension of the CSED is an important factor to weigh in your overall debt resolution strategy. If your financial situation is likely to improve soon, allowing you to pay off your debt more easily, the extension could be disadvantageous. Consult a tax professional to better understand how this affects your unique financial landscape and plan accordingly.
Five Years of Future Compliance
An accepted OIC isn’t the end of the road; rather, it’s the beginning of a new phase in your financial relationship with the IRS. You are required to comply with specific terms for a period, usually five years, after your OIC has been accepted. This commitment includes timely filing of all required federal tax returns and prompt payment of any and all taxes owed for those years.
This five-year period serves as a kind of probationary term during which the IRS closely monitors your financial compliance. It is critical to understand that any slip-ups—like late filings or missing tax payments—can have severe repercussions.
If you fail to meet these terms, the IRS can terminate your Offer in Compromise agreement. This is not a step the IRS takes lightly, but if initiated, it means your original tax debt can be reinstated. And remember, this reinstated amount could include additional penalties and interest accrued over time, making the debt potentially larger than before the OIC was granted.
Stay vigilant during this period. Some people find it helpful to set reminders for tax deadlines or even work with a tax professional to ensure complete compliance. This five-year term is your chance to demonstrate to the IRS that you’re committed to staying in good financial standing, so take it seriously.
Application of Refunds to Debt
Another often-overlooked aspect is the treatment of tax refunds. Any refunds that you are due within the calendar year that your OIC is accepted will be applied directly to your outstanding tax debt. This means you won’t receive a refund check or direct deposit for that tax year; instead, the IRS will use it to offset your existing debt. It’s a small but crucial detail to remember, especially if you’re accustomed to expecting a refund each year.
Being aware of these potential consequences is crucial for managing your expectations and preparing adequately for each phase of the OIC process. Ignorance is not bliss in the realm of tax resolution; the more you know, the better equipped you’ll be to navigate the complexities involved.
Navigating the OIC process requires both patience and diligence due to its potentially lengthy timeline.
The process can be long, often taking six months to a year (or longer) for a decision
An OIC is not a quick fix; it’s a comprehensive review of your financial situation by the IRS, and that takes time. Typically, you can expect a wait of at least six months to a year before a decision is reached. In some complex cases, it may take even longer. During this period, it’s essential to maintain your financial stability and compliance with tax laws, as any negative changes could affect the outcome of your application.
The IRS may request additional information during this time, extending the timeline
Be prepared for the possibility of the IRS requiring further documentation or clarification regarding your financial situation. When such requests are made, they usually come with deadlines for submission, and missing these can lead to delays, returns, or even rejection of your offer. Each request for additional information effectively pauses the clock on your application, extending the already lengthy process.
This is another reason why many choose to work with tax professionals when navigating an OIC, as they can help in promptly gathering and submitting any requested information, keeping your application on track.
Consider the Costs
The process isn’t free. Understanding the financial implications is key to navigating the OIC process successfully.
Be aware of the OIC non-refundable application fees and partial payment requirements.
When submitting your Offer in Compromise, it’s crucial to be fully aware of the initial financial obligations you’ll face, as they have implications for both your budget and the success of your application.
The application fee is your first financial commitment. This fee is non-refundable, meaning once you pay it, you won’t get it back, irrespective of the outcome of your application. Its purpose is to cover some of the administrative costs incurred by the IRS in evaluating your offer.
In addition to the application fee, you’ll likely also be required to make a partial payment. The nature of this payment can vary based on the terms of your offer. If you propose a lump-sum payment, a percentage of that sum must be included with your application. If you propose an installment plan, the first installment is typically required.
Remember, these are non-refundable payments. If the IRS rejects your offer or sends it back due to incomplete information or any other issue, these funds are generally not returned. As such, these costs should be factored into your decision-making process. Ensure you have the available funds and are willing to part with them, knowing you may not recoup these initial expenditures.
Understanding these financial commitments is vital as it can influence not just whether you decide to proceed with an OIC, but also how well you prepare your application to maximize the chances of acceptance.
Hiring a tax professional for help would be an additional expense
Choosing to enlist the help of a tax professional is a significant decision with both advantages and costs. On the one hand, a seasoned CPA or tax attorney brings a wealth of experience and specialized knowledge to the table. They can help you correctly fill out forms, navigate IRS regulations, and even advocate for you if issues arise. They can also analyze your financial situation to determine the most beneficial offer to make, potentially saving you more money in the long run.
However, this expertise comes at a price. The fees for hiring a tax professional can vary, sometimes significantly, depending on the complexity of your case and the reputation of the professional. Some may charge an hourly rate, while others might offer a flat fee for the entire process. Get a transparent cost breakdown before agreeing to any services. These costs can add up quickly and should be considered carefully in your overall financial planning for the OIC process.
Given these factors, weigh the potential benefits of professional assistance against the costs. It might make sense to at least have an initial consultation, which some professionals offer for free or at a reduced rate, to gauge the complexity of your case and whether you feel comfortable navigating it on your own.
By carefully considering these costs, you can make a more informed decision about whether to proceed with an OIC and how to prepare for the financial obligations involved.
While navigating the OIC process, you’ll find that arming yourself with the right tools and expertise can make all the difference. Fortunately, there are several additional resources available to assist you.
OIC Pre-Qualifier Calculator Tool
Before diving headfirst into the OIC process, it’s wise to gauge your eligibility and get a ballpark figure for a potential offer amount. The IRS offers an Offer in Compromise Pre-Qualifier Tool on its official website for this purpose. This online tool allows you to input your financial details, tax debt amount, and other pertinent information to determine if you’re a good candidate for an OIC and what amount you might expect to offer. While the Offer in Compromise Pre-Qualifier Tool isn’t a guarantee of acceptance, it provides valuable insights to set realistic expectations.
Consult a Tax Professional
The complexities of the OIC process often require a nuanced understanding that may go beyond the layperson’s expertise. If you find yourself confused or unsure about any part of the process—or even just the finer points—it’s well worth the time and potential expense to consult a tax professional. This could be a Certified Public Accountant (CPA) or a tax attorney experienced in OIC cases. Their specialized knowledge can clarify any confusions, provide tailored advice, and even help you strategize for the best possible outcome.
Using these resources can bolster your application and potentially streamline the process, enhancing the likelihood of securing a favorable OIC arrangement.
With this step under your belt, you should have a comprehensive grasp of the OIC process, its possible outcomes, and the obligations you’ll need to fulfill. Being well-prepared and well-informed allows you to navigate the labyrinthine process with fewer surprises, setbacks, or pitfalls. Armed with this knowledge, you’re now ready to step into the arena, ready for whatever comes next.
In future blog posts, we’ll explain in detail how to determine your eligibility, gathering necessary documentation, completing the forms, calculating your offer, and submission.
Does an IRS offer in compromise hurt your credit?
An Offer in Compromise (OIC) with the Internal Revenue Service is a settlement to pay your tax debt for less than the full amount you owe. The OIC itself doesn’t directly impact your credit score.
What is a reasonable offer for an offer in compromise?
Determining a “reasonable” offer for an Offer in Compromise (OIC) can be a complex process that involves a thorough analysis of your financial situation. The Internal Revenue Service uses specific formulas and guidelines to evaluate the reasonableness of an offer.
What is the downside of an offer in compromise?
An Offer in Compromise (OIC) is an agreement between a taxpayer and the Internal Revenue Service to settle a tax debt for less than the full amount owed. While it can be a beneficial option for some taxpayers, there are several downsides to consider including financial disclosure, costs, eligibility, impact on credit, legal consequences, impact on future refunds, uncertainty, and psychological stress. Each individual’s situation is unique, so it’s advisable to consult with a tax professional to determine whether an Offer in Compromise is the right option for you.
What qualifies you for an offer in compromise?
Qualifying for an Offer in Compromise (OIC) involves a detailed evaluation by the Internal Revenue Service. The IRS considers various factors to determine if you are eligible for an OIC.
How to settle with the IRS by yourself?
This blog post is just a small sample of our Do-It-Yourself OIC book, “Settle Your IRS Debt: The Step-by-Step Guide to Submitting Your Offer in Compromise.” Contact us for information on how to get an advanced copy or read our current blog post about settling with the IRS yourself.