How Does An IRS Offer in Compromise Work?
An offer in compromise (OIC) is an IRS program that allows you to make an offer of less than the total amount owed toward your tax debt.
Making an offer in compromise may be a legitimate option if you can’t pay your tax liability in full, or if doing so would create a financial hardship. If the IRS accepts the offer, you will pay your settlement amount, and the rest of your debt will be wiped clean. However, the IRS will only accept your offer if they feel that it is greater than or equal to the amount they would ever collect from you.
Your offer amount can either be paid in full, or in periodic monthly installments — whichever best suits your financial situation.
What to Know Before Applying for an IRS Offer in Compromise
There are two major points to understand about the OIC process. Firstly, most offers get rejected (about 60 percent) — the odds are not in your favor. An expert tax lawyer can help you put together a strong application and increase your chances of acceptance.
Secondly, outside of an audit, an OIC is the most scrutinizing process a taxpayer can experience. Because of the significant savings associated with tax settlements, the IRS offer specialist assigned to your case will investigate past and current financial transactions, along with any property and assets.
In short, every aspect of your financial life will be probed and prodded until no stone is left unturned. The whole thing can be intrusive, unsettling, and extremely stressful, so you should consult with a licensed tax professional before considering this route.
An Example of an Offer in Compromise
Here at Boxelder, we’ve helped hundreds of clients like you negotiate offers in compromise with the IRS. Lauren, a Boxelder client, owed more than $70,000 to the IRS. Her business had failed, and she had accrued more liability than she could possibly pay off. Being married and having two children, she was beginning to think that she would owe the IRS money for the rest of her life.
When Lauren contacted Boxelder Consulting, a licensed tax professional reviewed her financial condition and determined that she could save tens of thousands of dollars by filing an offer in compromise. After extensive negotiations with the IRS, Lauren settled her debt for just $6,000.
$70,000 – $6,000 = $64,000 in savings
How to Negotiate an Offer in Compromise With the IRS
Negotiating an OIC with the IRS is a time-intensive process. First, you need to decide how much money to offer, and how you plan to pay that amount. Then you must complete your application and prepare the necessary documentation before submitting your offer. Once submitted, it may take up to two years before the IRS accepts or rejects your offer.
Resolving your tax debt is daunting, but the first step is truly the hardest. Countless Boxelder clients have said that after their initial consultation, they felt a massive weight lifted from their shoulders. Whenever you’re ready, the experienced tax attorneys at Boxelder Consulting can guide you through the OIC process and negotiate with the IRS on your behalf.
How Much Should I Offer in Compromise to the IRS?
Your offer to the IRS should be equal to your reasonable collection potential — a number representing the highest amount of tax the IRS can collect before your debt expires. The IRS calculates this amount based on the total value of assets (real estate, savings, investment accounts, etc.) and your monthly disposable income after all allowable living expenses are covered.
Here’s an example of how reasonable collection potential can be calculated: let’s say that you have $40,000 of equity in your house and $10,000 in other investments. This means that your offer amount should be at least $50,000 (the total of your assets), before you account for monthly disposable income. If you have $200 of disposable income each month (income after living expenses), the IRS expects you to use that money to pay off your tax debt.
So if there’s 10 years left before your tax debt’s Collections Statute Expiration Date (CSED), you should add $24,000 to your reasonable collections potential. In this scenario, your Offer in Compromise should total $74,000.
Remember – the IRS uses strict guidelines to determine which living expenses are allowable, and how to assess the value of your property. For this reason, it’s very important to hire a tax professional to put together an offer that fits the IRS’s criteria.
How Do I Apply For An Offer In Compromise?
To apply for an OIC, the taxpayer must complete the Offer in Compromise Booklet (Form 656-B), which includes:
- Form 656 (Offer in Compromise)
- Form 433-A (for individuals) or Form 433-B (for businesses)
- Three months of meticulous documentation on every expense and income source.
- $186 application fee, unless the taxpayer meets the requirements for Low Income Certification
- The initial offer payment, unless the taxpayer meets the requirements for Low Income Certification
- Form 656-L, if the taxpayer is applying for an OIC due to Doubt as to Liability (see below)
Who is Eligible?
To be eligible for an OIC with the IRS, the taxpayer must demonstrate that their tax debt has been legally compromised for one of the following reasons:
- Doubt as to Collectibility — the taxpayer does not have enough in assets and income to pay their debt in full.
- Exceptional Circumstances (Effective Tax Administration) — the taxpayer does have enough in assets and income to pay their debt in full, but due to an exceptional circumstance, doing so would cause a financial hardship.
- Doubt as to Liability — the assessed tax is incorrect
In addition, the taxpayer’s filings and estimated tax payments must be up to date through the current tax year. This means that if you have missing tax returns – you’ll have to get them filed before you apply.
Another requirement for an OIC is that the taxpayer must not be involved in an open bankruptcy proceeding. Let our team know if this is the case for you, and we’ll find another resolution option that fits your financial situation.
What Happens After I Apply?
As mentioned earlier, it can take up to two years for the IRS to process your OIC application. The good news? The IRS will not pursue collections while processing your OIC. Whether the IRS accepts your proposal or not, this can provide you with some needed breathing room.
Here are a few important to things to know after your OIC application is complete:
- If the IRS grants a settlement but the taxpayer incurs further tax liability during the following five years, the offer will be retroactively rejected and the taxpayer will owe that money again. We refer to this as the “nightmare scenario.”
- The IRS has two years to accept or reject an offer, during which the clock pauses on the debt’s CSED.
- If the IRS rejects an OIC, the taxpayer has 30 days to request an appeal.
Benefits of an Offer in Compromise
Applying for an OIC is undoubtedly a serious commitment and a stressful process. But in many cases, it’s the best financial option for the taxpayer. There are several major benefits to proposing an OIC to the IRS:
- If the taxpayer cannot pay their debt in full, or if doing so would cause serious financial hardship, then an OIC can be their golden ticket to debt forgiveness and financial freedom.
- While the IRS considers an OIC, it suspends all collection activities against the taxpayer.
- If the taxpayer’s offer is accepted, the IRS will remove all federal tax liens filed against them.
Boxelder’s team of licensed tax professionals has decades of combined experience, and negotiating tax settlements is our bread and butter.
Call us today — we’d be happy to assess your options and answer any questions you may have during a free consultation.