%20-%20WHITE.png)
The Offer in Compromise (OIC) program, provided by the Internal Revenue Service (IRS), offers financially distressed taxpayers the opportunity to settle their tax debts for less than the full amount owed. It’s designed to help those who cannot pay their full tax liabilities. However, the IRS will only accept an offer if it determines that the taxpayer is unable to pay the full amount over time through an installment agreement.
The OIC program has evolved over the years, particularly through the IRS’s “Fresh Start” initiative, which made the terms more flexible and accessible. In this article, we’ll explore the key aspects of the OIC program, including application fees, up-front payments, low-income taxpayer provisions, lump-sum offers, periodic payment offers, and the qualification requirements for this program.
Up-Front Payments
When applying for an OIC, taxpayers are generally required to make a non-refundable, up-front payment. This payment is necessary while the IRS reviews the offer. However, taxpayers who meet the Low Income Certification guidelines are exempt from this requirement. According to the OIC booklet (Form 656-B, April 2024 edition), there are two primary payment options:
Lump-Sum Offers: Taxpayers must pay 20% of the offer amount up front, with the remaining balance due in five or fewer installments within five months of the offer's acceptance.
Periodic Payment Offers: This option allows taxpayers to make payments over 6 to 24 months. The first payment must accompany the offer, and subsequent payments must align with the proposed terms.
Both types of payments are applied to the taxpayer's liability, even if the offer is rejected, and are not refundable.
Application Fee
The standard application fee for submitting an OIC is $205. However, there is an exception for low-income taxpayers, which is determined based on the applicant’s Adjusted Gross Income (AGI) and household size. If the taxpayer’s AGI doesn’t exceed 250% of the applicable poverty level, the application fee is waived. This provision is outlined in the Low-Income Certification chart included with Form 656.
OIC Concepts
An OIC is based on one of the following concepts:
Doubt as to Liability: This applies when there is a legitimate dispute about the amount or existence of the tax debt. Taxpayers who believe the debt is incorrect can submit an OIC under this concept using Form 656-L.
Doubt as to Collectability: If a taxpayer's assets and income are insufficient to pay the full tax liability, the IRS may accept an offer based on the taxpayer's reasonable collection potential.
Promotion of Effective Tax Administration: In cases where paying the full tax debt would result in economic hardship or would be unfair, the IRS may accept an offer, even if the taxpayer has the means to pay the full amount. This is less common and requires strong justification.
OIC Qualifications
To qualify for an OIC, taxpayers must meet certain conditions, including:
Filing all required tax returns.
Making all required estimated tax payments for the current year.
Not being in an active bankruptcy proceeding.
Using the most current version of Form 656 and submitting all required documentation.
Pre-Qualifier Tool
The IRS provides an Offer in Compromise Pre-Qualifier tool on their website to help taxpayers assess their eligibility. This tool is an excellent starting point before submitting an official offer.
Submission Procedures
To apply for an OIC, taxpayers must complete Form 656 along with Form 433-A (for individuals) or Form 433-B (for businesses). These forms require detailed information about the taxpayer’s financial situation. Incomplete forms or missing documentation can lead to delays or rejection of the offer.
Rejected or Withdrawn Offers
If an offer is rejected, the IRS will issue a written notice explaining the reason. Taxpayers have the right to request a meeting or appeal the decision within 30 days. In cases where the offer is withdrawn or determined to be non-processable, the IRS will return the application fee but will apply any payments made toward the outstanding tax debt.
Accepted Offers
If the IRS accepts an OIC, the taxpayer must adhere to the payment terms. Once the terms are met, the IRS will release any Notices of Federal Tax Lien. Accepted offers become public information, and for offers over $50,000, the IRS Chief Counsel’s written opinion is required.
IRS Financial Analysis Guidelines
The IRS uses allowable living expense standards to evaluate a taxpayer’s ability to pay. These standards are based on:
National Standards: Covering expenses for food, clothing, and other essentials.
Local Standards: Covering housing, utilities, and transportation.
Other Necessary Expenses: Including healthcare, taxes, and court-ordered payments.
Working with TPSA CPAs
The Offer in Compromise program is an effective tool for taxpayers burdened by tax debt. While the process can be complex, it offers a viable path to financial relief. Consulting a tax professional is often the best approach to ensure a smooth and successful application.
Need help with your Offer in Compromise? Contact us today for expert guidance!
Comments