Many taxpayers in financial hardship cannot afford to pay their full tax debt. For them, the IRS has designed payment plans that allow reduction in tax debt. Offer in Compromise (OIC) is one such plan. It allows tax debt reduction for taxpayers that do not have the ability to pay their full back taxes.
Your ability to pay is a major qualifying factor for Offer in Compromise. You must not have sufficient income, equity in assets and ability to take a loan to pay your full back taxes. The IRS has to allow you enough funds to meet allowable living expenses. Allowable living expenses are basic food, shelter, medical care, personal care, transportation, and other necessary expenses. Therefore, the IRS can only collect the funds that you are left with after meeting allowable living expenses.
Depending upon your ability to pay, the IRS will design an agreement where you pay a reduced tax debt in a lump sum or over time in installments. You may be able negotiate the terms to make the agreement more affordable. The help of a tax professional may be necessary for negotiations with the IRS.
Before applying for OIC, keep the following rules in mind:
- You must have filed all tax returns.
- None of your returns should be fraudulent.
- You must be not have committed tax evasion.
- You cannot apply if you are in an open bankruptcy proceeding.
- You should have the ability to pay a reduced amount of tax debt.
With your OIC application, you need to pay the application fee of $186, which is non-refundable. You also need to pay an initial payment with each Form 656. This payment is non-refundable as well.
If you cannot pay the application fee, you may meet the Low Income Certificate guideline. If you do, you will not need to pay the application fee and make the initial monthly payments during the evaluation of your application.
Taxpayers with limited ability to pay should consider Offer in Compromise to get a resolution to avoid IRS penalties and interest, and collection actions. The sooner the resolution process starts, the more advantageous it is for the taxpayer.