Imagine owing a tax debt so burdensome that you can’t see yourself ever being able to pay it. Wouldn’t it be nice if there was some way to write off some of your tax debt? Believe it or not, there’s something called an offer in compromise that allows taxpayers with back taxes to settle their tax debts with the IRS for less than the full amount. While not a magic reset button, the offer in compromise serves as a helpful tool for getting out from under the IRS’ thumb.
How to Get an Offer In Compromise: The Basics
An offer in compromise, or OIC, is applied for by the taxpayer. The IRS has no obligation to accept an OIC and doing so is up to the IRS’ discretion. There are three primary reasons an OIC will be granted:
- Doubt as to liability: This occurs when there is uncertainty as to the amount of tax debt or whether any taxed debt is owed at all.
- Doubt as to collectability: This exists when there is uncertainty as to whether the IRS will be able to collect the tax debt.
- Effective tax administration: This third method basically means that a full tax debt won’t be collected when doing so would create undue hardship for the taxpayer.
How to Get an Offer in Compromise: The Details
Depending on the basis for the OIC request and the financial position of the taxpayer, he or she will have to submit an application fee ($186.00 at the time of this writing), plus an initial payment that goes toward the tax debt. Depending on the payment options chosen by the taxpayers, this initial payment can be up to 20% of the tax debt.
There is also the large amount of financial information and documentation that will need to be provided. All of this information is needed by the IRS to help it determine if the IRS really will be better off by accepting less than full payment of a tax debt.
Most of the application forms needed for an OIC can be found in the Offer in Compromise Booklet, or Form 656-B. The exact combinations of forms needed and information to be provided will depend on the taxpayer’s unique situation.
Things to Keep in Mind When Applying for an Offer in Compromise
- Applying for an OIC usually requires the production of a copious amount of financial information. This will take a large amount of time and effort to produce, not to mention lets the IRS obtain financial information about the taxpayer they wouldn’t otherwise have.
- The IRS has two years to make a decision whether to accept or reject a taxpayer’s OIC. If the existing tax debt is building up interest, this waiting time can result in a significantly larger tax debt. On the flip side, if the IRS makes no decision within two years, the OIC is automatically accepted.
- Less than half of OIC applications are accepted. In 2010, only about 25% of applications were accepted, but in 2013, the rate rose to 42%.
- If the OIC application is rejected, the IRS will keep the application fee and apply any payments made to the existing tax debt.
- A Notice of Tax Lien may be filed while the OIC is being considered.
- If an OIC is rejected, the taxpayer has the right to appeal the decision.
In Summary
As with many of the other interactions a taxpayer may have with the IRS, the process can get very complicated. The OIC process is not easy and if not properly conducted, may place the taxpayer in a worse situation. As a result, a taxpayer is strongly urged to seek the advice of a tax professional in deciding whether an OIC should be attempted and if so, the taxpayer will likely benefit from a tax professional’s assistance in the application process.