What is an IRS Offer in Compromise? Tips for Success

March 04, 2024 by Charla Suaste
Woman thinking about Tax

In today’s blog, we’re going to be discussing IRS Offers in Compromise (OIC).

What is an IRS Offer in Compromise? An IRS Offer Compromise (OIC) is an attempt to settle your tax liability with the IRS for less than what is owed.

There are three types of Offers in Compromise available to taxpayers.

 

  • The first type is Doubt as to Collectability. This option is the most used, and the substantial majority of accepted offers are through this method.
  • The second type is Doubt as to Liability. This occurs when the taxpayer genuinely believes they do not owe the debt, but they cannot come to an agreement with the IRS.
  • The third type is Effective Tax Administration. This is when you are stating to the IRS that you are able to pay the balance in full, but because of other exigent circumstances, (for example, if paying the entire balance due would create an economic hardship), you believe the liability should be settled for less than what is owed.


Since Doubt as to Collectability is the most common (and successful) type of OIC, that is what we will be discussing today.
 


What should you keep in mind before submitting an OIC request to the IRS?

 

  1. Make sure you are in compliance with your tax filing responsibilities.

    First things first: before the IRS will accept any submission of an IRS Offer In Compromise, you must be in compliance with your tax filing responsibilities. What does this mean? This means that if you have any back tax returns that have not been filed, those will need to be filed before the IRS even will review your Offer in Compromise.
     
  2. Use the IRS Pre-Qualifier tool.

    Once all your tax returns have been filed, the next thing to do is use the IRS Pre-Qualifier tool. This tool basically gives you an indication of whether there is at least a chance the IRS will accept your offer. We always suggest that taxpayers use this tool to check because if the IRS calculations show that you can pay the full balance, then it is not worth it to submit the offer.
     
  3. Complete the IRS paperwork.

    Once you’ve used the pre-qualifier tool, the next step is to complete the IRS OIC paperwork. This is done by walking through the steps outlined in the IRS Form 656 Offer in Compromise Booklet. The form will ask you a number of questions about everything, including the equity you have in your investments and vehicles, your wages and income, etc. They will also ask for supporting documentation to corroborate whatever you put on the form. Basically, what the IRS is looking for is a full financial picture of your current situation to make a determination.

    It is very important to complete the OIC form in its entirety. If it's not completed in full, the IRS will either reject the request or not even process it. If there are minor errors, the IRS may give you the opportunity to correct them, but it is better to avoid them so as not to further delay the process.
     
  4. Decide whether you want to submit an Offer in Compromise based on a 20% down payment or periodic payment offer.

    Before submitting the Offer in Compromise, you have to decide whether you want to submit the form based on a 20% down payment or a periodic payment offer. The first option allows you to use a monthly disposable income period of 12 months, where you’ll make a 20% down payment of the offer amount. The second option gives you the option of using a periodic payment offer, meaning as the offer is processed, you’ll make monthly payments toward the debt.
     
  5. Be patient.

    Once submitted, it can take the IRS about six to nine months to process the paperwork. Your case will be assigned to an IRS Settlement Officer, who will then get in contact with you (or your Power of Attorney) to review the financials and see if there have been any updates. Oftentimes, they will request updated bank statements since the bank statements they will have in their possession could be anywhere from six to nine months old.


Assuming everything checks out and the offer amount is accepted, the settlement officer will then send you an acceptance letter. It is important to note that the acceptance is conditional for the next five years and is based on you being in filing and payment compliance. This means you have to file any required tax returns and pay any tax liabilities on time for the next five years. You must also make timely estimated tax payments for the next five years, if necessary.

 

If your Offer in Compromise is rejected, you do have appeal rights.

 

You can appeal the OIC rejection within 30 days, and your case will be assigned to the IRS OIC Appeals. One thing our Tax Debt Relief team likes to do is file an OIC through a collection due process hearing. The reason for this is that if your offer is rejected, even in Appeals, then you have the option to take the case to Tax Court.

We hope this blog has been helpful to you! If you still have more questions or would like further assistance with an Offer in Compromise, you can contact the Tax Debt Relief experts at TaxAudit. They will provide you with a free, no-obligation consultation where they can take a look at your situation and determine the next steps.

If you’d like to take advantage of this process – or just get more information, please click here. We are ready to help!

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Charla Suaste
Communications Content Developer

 

Charla Suaste joined TaxAudit back in 2007 and, over the past 14 years, she has worked in a variety of different roles throughout the organization, including as a Customer Service Representative, Case Coordinator, and Administrative Services Assistant. She now serves as the Communications Content Developer and is passionate about writing, editing, and making even the most complex concepts easy to understand. Outside of work, Charla enjoys traveling, listening to podcasts, and spending time in her garden.


 

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