Offer In Compromise Overview
Making an offer in compromise (OIC) 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.
There are two major points to understand about the OIC process. Firstly, most offers get rejected (about 40 percent) — the odds are not in your favor.
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
Lauren 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.
Lauren contacted Boxelder Consulting, and after a licensed tax professional reviewed her financial condition, they 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
Offer in Compromise – Rules and Requirements
- In order 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)
- Through this application, 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.
- To be eligible for an OIC, the taxpayer’s filings and estimated tax payments must be up to date through the current tax year.
- To be eligible for an OIC, the taxpayer must not be involved in an open bankruptcy proceeding.
- If the taxpayer’s offer is accepted, they may choose to make a one-time payment, pay over six months, or make payments over a 24-month period.
- 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
- 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.
Applying for an OIC is undoubtedly a serious commitment and a stressful process. But 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.