Using an Offer in Compromise to Settle Your Tax Debt

kienitz lien tax offers in compromise

You may have heard those commercials about settling a tax debt for pennies on the dollar. It sounds too good to be true, but is it? Yes and no. While it’s possible to significantly reduce your tax debt with the IRS, you’re probably not going to be able to pay pennies on the dollar. The following blog post intends to explain what the offer in compromise (OIC) is and help you determine if it’s something you should consider.

How Does an Offer in Compromise Work?

An OIC is a special program where the IRS agrees to accept a taxpayer’s debt as satisfied even though the taxpayer only pays part of it off. The IRS agrees to do this because it only has a limited amount of time or resources to collect back taxes. Therefore, in situations where the IRS believes it will have difficulty in collecting a tax debt, it is willing to accept some of its money rather than none of its money.


What’s the Catch with an OIC?

The IRS doesn’t have to accept a taxpayer’s request for an OIC and most of the time, it doesn’t. To apply for an OIC, a taxpayer will have to reveal a significant amount of financial information to the IRS to prove why it should be able to have its tax debt reduced. And while the IRS decides on whether to accept the OIC or not (the IRS has two years to do so), tax penalties and interest continue to accrue.

In most situations, an OIC will only be accepted by the IRS if the taxpayer’s financial situation is very dire and this completely understandable. Why would the IRS accept a smaller amount if it thinks the taxpayer has the financial ability to pay back its entire tax obligation?


How Can a Taxpayer Get an OIC?

While it’s not easy to get an OIC accepted by the IRS, it’s not impossible. Besides proving significant financial hardship, the IRS will be likely to accept an OIC if:

  • There are questions as to the existence or amount of the tax debt, or
  • The IRS may not have the ability to collect the tax debt.

In the first situation, there could be a legal question as to whether a tax debt is owed at all or if so, what the amount would be. For example, maybe the law isn’t entirely clear whether a taxpayer is supposed to pay 5% or 10% tax on a certain type of income. It may take years of tax litigation in court to get this question resolved. To avoid the risk of losing in court or spending years in a legal battle, the IRS may agree to accept less than it originally tried to collect.

The second situation might exist if the taxpayer’s assets are located in a place the IRS may not have jurisdiction or the IRS doesn’t have the resources to recover the money.

The exact OIC application process will vary, depending on the taxpayer’s specific tax situation. But it begins with submitting an application and fee, plus an initial payment that’s often amounts to 20% of the tax debt. The taxpayer will also need to divulge a host of financial information.


Still Interested in Getting an OIC?

Additional information for applying for an OIC can be found in Form 656-B, also known as the Offer in Compromise Booklet. Also, it’s strongly recommended that a taxpayer consult with a tax attorney or other tax professional who can provide more specific information on exactly what the taxpayer will need to do to get an OIC.



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