If you are not able to pay your tax debt in full, or if paying it causes you financial hardship, an offer in compromise (OIC) might be a good option.
Basically, an offer in compromise is an agreement between a taxpayer and the IRS that allows the taxpayer to pay off their debts for less than the total amount owed. However, there are very specific guidelines that the taxpayer must meet to qualify for an OIC.
Offer in Compromise Application
Applying for an OIC can take a long time, but it’s worth it if you really want to reduce your tax debt. These are the steps you must follow:
Step 1: Make sure you meet the requirements
In order to qualify for an offer in compromise with the IRS, you must meet the following:
- You have filed all your tax returns.
- You have made all required estimated tax payments.
- If you are a business owner with employees, you must have made all required federal tax deposits for the current quarter.
Please note that if you are in open bankruptcy, you don’t qualify for an OIC. Anyway, you can use the Offer in Compromise Pre-Qualifier tool to confirm whether you are eligible or not.
Step 2: Submit your Offer in Compromise
If you decide to submit an offer, the IRS will need you to provide complete financial information. This way, you will need to make a list of your income, expenses, assets, and any debts owed to those assets.
In addition, you will need to submit the following:
- Form 656 (Offer in Compromise)
- Form 433-A for individuals or Form 433-B for business.
- Photocopies of all required supporting documentation.
- $ 205 application fee (non-refundable).
- Down payment (non-refundable) for each Form 656. This may vary depending on the offer and the payment option you choose.
Step 3: Choose a Payment Option
According to the IRS, you can choose to pay the amount of the offer in a lump sum or in periodic payments:
- Lump Sum Cash Offer: generally, you will be required to pay 20 percent of the total amount you are offering when you submit the offer. You will have to pay the remainder in 5 installments or less within 5 months or less from the date the IRS accepts the offer.
- Periodic Payment Offer: you will be required to make the first proposed installment payment when you submit the offer and the rest within 24 months, according to the terms of your OIC. Just like the 20 percent payment required for a lump sum cash offer, this first payment is non-refundable. Also, while the IRS evaluates your offer for periodic payment, you must continue to make the installment payments set forth in the terms of offer. These amounts are not refundable either.
In case you meet the certification requirements to be considered a low-income taxpayer, you don’t have to submit the application fee or down payment. In the same way, you don’t have to make monthly payments while the IRS evaluates your offer.
Step 4: Comply with the terms of the OIC
If the IRS accepts your offer, you must fully comply with all the terms and conditions of the OIC. In case you don’t, the IRS can determine that the offer is in default.
If the IRS cancels the OIC, it will no longer be in effect and the agency will be able to collect the amounts originally owed plus interest and penalties.
What if an Offer in Compromise is rejected?
On the other hand, if the IRS rejects your offer, you will receive a rejection letter by email. The IRS will explain the reasons why it rejected the offer and will provide detailed instructions on how you can appeal the decision to the IRS Office of Appeals.
Please note that the appeal must be made within 30 days from the date you received the rejection letter. If it’s been more than 30 days from that date, your appeal will not be accepted.