Owing the IRS money is very stressful. If you can’t pay in full by the deadline date, you are likely to face collection actions if you don’t work out an arrangement to pay off your tax debt. In many cases, you can set up a payment plan to satisfy your unpaid taxes. This allows you to make payments over several months or years. For some, however, this may not be an option. Another way to settle your back taxes is to apply for an Offer in Compromise (OIC). Although we strongly recommend working with a tax professional, you can do this on your own. Keep reading to learn how to apply for an IRS Offer in Compromise and what you can do to increase your chances of having it accepted.
What is an Offer in Compromise?
An Offer in Compromise is an agreement with the IRS that lets you settle your tax debt for less than the full amount owed. To qualify for an OIC, you must be current on all required tax filings and estimated tax payments for the current year. If you’re a business owner with employees, you must also make all required federal tax deposits for the current quarter. Additionally, you must have received a bill from the IRS for at least one of the tax debts included in your OIC.
If you are currently in an open bankruptcy proceeding, tax audit, or innocent spouse claim, you are not eligible to apply for an Offer in Compromise at this time.
Reasons Why The IRS May Accept an OIC
Even if you meet the eligibility requirements for an OIC, the IRS may still not accept your offer. There are generally three (3) reasons why an Offer in Compromise is accepted.
- Doubt as to Liability. If there is a genuine dispute regarding the amount of tax debt you owe, the IRS may accept your OIC.
- Doubt as to Collectibility. The IRS will likely approve an OIC if it cannot fully collect on your unpaid tax debt. This typically happens when your assets and income are less than the amount owed.
- Effective Tax Administration. An OIC may be approved if the IRS deems that paying your tax debt would create a financial hardship, or would be unfair due to exceptional circumstances.
In most cases, an Offer in Compromise will be rejected unless the amount offered is equal to or greater than the amount the IRS believes it can collect. This is known as reasonable collection potential (RCP). When calculating your RCP, the IRS includes the value of your real property, bank accounts, vehicles, future income, and other assets, minus your allowable living expenses.
The IRS does provide an Offer in Compromise Pre-Qualifier tool that will give you instant feedback on whether you may be eligible for an OIC. It also assists with determining how much you should agree to pay. The feedback provided, however, is never guaranteed. It may be possible to get your offer approved even if the tool suggests that it would be rejected.
How to Apply for an IRS Offer in Compromise
Depending on the reason for requesting an OIC, you will need to submit specific forms and documentation. In many cases, you’ll also be required to pay an application fee and enclose a payment with your offer.
Doubt as to Collectibility or Effective Tax Administration Claim
If you believe that you qualify for an OIC based on Doubt as to Collectibility or Effective Tax Administration, and meet the eligibility requirements, there are specific forms you must complete. You’ll need to file Form 656, Offer in Compromise, and either Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals, and/or Form 433-B (OIC), Collection Information Statement for Businesses.
In addition to the forms, you’ll also need to pay the $205 application fee and include an initial payment. The fee may be waived, however, if you qualify for a low-income exception. There are two payment options when submitting an Offer in Compromise:
- Lump Sum Cash Offer. You may pay off a lump sum cash offer all at once or make five (5) or fewer installment payments in five (5) months or less. When using this payment option, your initial payment must be at least 20% of your total offer amount. This is in addition to the $205 application fee. The payment is typically non-refundable. This means that it won’t be returned even if your offer is rejected. Instead, the amount will be applied to your outstanding tax balance.
- Periodic Payment Offer. With a periodic payment offer, you’ll have up to two (2) years to pay off the full amount. You must include the first proposed payment along with your forms and application fee. For example, if your offer is for $20,000 and you propose to make 20 payments over 20 months, your initial payment would be $1,000. Similar to the lump sum cash offer, your initial payment and any subsequent payments made while waiting for approval/denial is generally non-refundable.
If you need assistance completing Form 433-A (OIC), be sure to check out the IRS Video portal. This helpful video will take you line-by-line through the form.
Doubt as to Liability Claim
To request an OIC for Doubt as to Liability, you must complete and submit Form 656-L, Offer in Compromise (Doubt as to Liability). You’ll also need to provide a written statement explaining why the amount you owe is incorrect. Additionally, you need to provide documentation that supports your claim. Failure to include the written statement will result in your OIC being returned without further consideration. Unlike Form 656, there is no application fee or payment required if you are requesting an OIC for Doubt as to Liability.
It’s important to note that you should only file Form 656-L if you are unable to dispute the amount owed during the time allowed by IRS guidelines or the Internal Revenue Code. Additionally, you can’t submit an OIC for Doubt as to Liability if you are also applying under Doubt as to Collectibility. If you submit both at the same time, the Doubt as to Collectibility offer will be returned without further consideration.
Final Application Steps
Before sending in your OIC offer, be sure to review your application for errors and omissions, sign the forms, and include all required documentation and fees (if applicable). If you haven’t received a bill for the tax debt included in your offer, you must include a full copy of your tax return that was filed within 12 weeks of submitting your application. If you fail to include a copy of your return or a tax bill, your offer will likely be returned.
After you submit your OIC, you must also continue to file all required tax returns and pay any new taxes due. Failure to meet your tax responsibilities while your offer is being considered will result in the IRS returning your offer.
I Applied. Now What?
Once you have submitted your OIC application, it generally takes around six (6) months for the IRS to make a decision, but it may take longer. During the evaluation period, the IRS may file a Notice of Federal Tax Lien, but all other collection actions are suspended. If you have an existing installment agreement, you won’t be required to make any payments. You will, however, need to make any payments associated with your OIC offer.
The IRS may also send requests for additional information during the review process. Be sure to send items within the time frame requested. Failure to reply will result in the return of your offer without appeal rights.
Once the IRS has carefully considered your OIC application, they will either accept, return, or reject your offer. If no decision is rendered within two (2) years, your OIC is automatically accepted.
If Your OIC is Accepted
Approximately 1 out of 3 OIC offers is accepted. If the IRS accepts your offer, you must meet all terms listed in section 7 of Form 656. Any tax refunds you receive during the calendar year in which the offer was accepted will be applied to your outstanding balance. No additional interest, however, will accrue once the offer is accepted.
Tax liens won’t be released until you satisfy your tax debt. You must remain compliant with all tax filings and payments for five (5) years from the date your offer was accepted. This includes any extensions, as well. You may request a one-time payment extension on your OIC within a 24-month period. The offer terms, however, cannot be altered or extended once it is accepted. Failure to pay your OIC on time or remain compliant will result in default.
Once an OIC is accepted, future tax balances can’t be added to the offer. They must be paid in full or your offer will default. Payment plans are not accepted for any new balances. If your offer defaults, the IRS may levy or file suit to collect an amount equal to your original tax debt minus any payments made under your OIC agreement. All penalties and interest will be added back to the balance. Liens and levies may also be placed on your account.
If Your OIC is Returned
The IRS will return your OIC offer if you haven’t met the eligibility criteria, such as filing all required tax returns or making estimated tax payments for the current year. When this happens, your $205 application fee will be returned but any payments included in the offer will be applied to your tax balance.
The IRS will not reconsider your OIC application if it was returned for any of the following reasons:
- You’re in an open bankruptcy case
- You failed to file returns and/or make required payments after submitting your offer
- The offer was submitted simply to delay payment
- The IRS believes that the collection of your taxes is in jeopardy
- There are other IRS investigations pending (such as an audit)
- The original assessment was abated
If you believe the IRS returned your offer in error, you may request reconsideration. This must be done within 30 days from the date on your return letter by calling the number listed on it.
If Your OIC is Rejected
You will be notified by mail if the IRS rejects your offer. The letter will explain the reasons for the rejection and provide instructions on how to appeal the decision. You must appeal (Form 13711) within 30 days from the date of the letter.
If you agree with the decision, you may either pay your tax debt in full or request an installment agreement.
Final Thoughts
Although it is entirely possible to file an OIC on your own and have it accepted, most taxpayers wind up offering the IRS more than they should. Don’t make that mistake. Unless you have a good grasp of the current tax rules and procedures, and a lot of time on your hands, we highly recommend working with a tax professional. A tax professional can ensure you meet eligibility requirements, complete the correct forms, include all necessary documentation, and submit an offer that works to your benefit. To see if you qualify for an OIC or other tax relief programs, call Tax Defense Network at 855-476-6920 for a free consultation today!