If you are looking to settle your IRS tax debts, an Offer in Compromise can help you settle your tax liabilities for less than the full amount you owe. Here we explain how to apply for this tax debt relief.
To qualify for an Offer in Compromise, you must have filed all required tax returns and made all required estimated payments.
If you are in open bankruptcy proceedings, you will not be able to apply for this IRS program.
In order to confirm if you meet the eligibility criteria, you may use the Offer in Compromise Pre-qualifier.
If you qualify for an OIC, the next step will be to obtain a copy of your IRS account transcripts for the tax years you owe. You’ll need to determine the amount you owe, including penalties and interest.
The IRS will need you to complete a financial analysis to calculate your reasonable collection potential (RCP). The RCP is how the IRS measures your ability to pay and it determines whether your offer will be accepted or rejected.
The RCP includes the value that can be realized from your assets, such as real estate, cars, bank accounts, etc. It also includes anticipated future income less certain allowable amounts for basic living expenses.
If the amount offered by you is equal to or greater than the reasonable collection potential, then your offer must be accepted.
If your offer is acceptable, you will need to submit the following to the IRS:
- Form 433-A (individuals) or Form 433-B (businesses) and all required documentation as specified on the forms.
- Form 656 – individual and business (Corporation/ LLC/ Partnership) tax liability must be filed on a separate Form 656.
- $205 application fee (non-refundable).
- Initial payment (non-refundable) for each Model 656.
Once you have all of these documents ready, mail them to the appropriate IRS processing office in your state.
While the IRS reviews your offer, you must continue to make payments according to the terms of the offer as if it had been accepted.
You must also remain in full compliance with the tax code for 5 years after the approval of the offer. If a federal tax return is late or new tax debt is incurred during this 5-year period, the IRS will revoke your offer and it will be able to collect the full amount of the existing debt with interest.
If the IRS rejects your OIC, you may appeal a rejection within 30 days using Form 13711, Request for Appeal of Offer in Compromise. You can get additional assistance in appealing your rejected offer from the IRS Independent Office of Appeals.