If you’re struggling with tax debt and searching for “how to apply for an IRS Offer in Compromise,” this comprehensive guide will walk you through the process, eligibility criteria, required forms, and tips to enhance your chances of approval.
What is an Offer in Compromise?
An Offer in Compromise is a legal agreement between a taxpayer and the Internal Revenue Service (IRS) that allows the taxpayer to settle their outstanding tax debt for less than the full amount owed. This program is designed to provide a fresh start for individuals or businesses struggling with substantial tax liabilities that they cannot realistically pay in full.
The Benefits of an Offer in Compromise (OIC)
Submitting an Offer in Compromise can provide several advantages for taxpayers struggling with overwhelming tax debt:
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Reduced Tax Liability: The primary benefit of an accepted Offer in Compromise is that it allows you to settle your tax debt for a fraction of the original amount owed, potentially saving you hundreds or even thousands of dollars.
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Fresh Start: An accepted Offer in Compromise provides a clean slate, allowing you to move forward without the burden of significant tax debt hanging over your head.
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Avoid Aggressive Collection Actions: By resolving your tax debt through an OIC, you can avoid aggressive collection actions from the IRS, such as wage garnishments, bank account levies, or property seizures.
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Peace of Mind: Resolving your tax debt through an OIC can alleviate the stress and anxiety associated with owing substantial amounts to the IRS.
How to Apply For an IRS Offer in Compromise
Step 1: Determine Your Eligibility
Before applying, ensure you meet the following criteria:
- Filing Compliance: All required tax returns have been filed.
- Estimated Payments: All required estimated tax payments have been made.
- Bankruptcy Status: You are not in an open bankruptcy proceeding.
- Employer Requirements: If you’re an employer, all required federal tax deposits for the current and past two quarters have been made.
To assess your eligibility and prepare a preliminary proposal, use the IRS’s Offer in Compromise Pre-Qualifier Tool.
Step 2: Gather Required Forms and Documentation
To apply for an OIC, you’ll need to complete the following forms:
- Form 656: Offer in Compromise.
- Form 433-A (OIC): Collection Information Statement for Wage Earners and Self-Employed Individuals.
- Form 433-B (OIC): Collection Information Statement for Businesses (if applicable).
These forms require detailed information about your financial situation, including income, expenses, assets, and liabilities. You can find step-by-step instructions in the Form 656-B, Offer in Compromise Booklet.
Step 3: Choose a Payment Option
When submitting your application, select one of the following payment options:
- Lump Sum Cash Offer:
- Submit an initial payment of 20% of the total offer amount with your application.
- Pay the remaining balance in five or fewer payments within five months of acceptance.
- Periodic Payment Offer:
- Submit your initial payment with the application.
- Continue to make monthly payments while the IRS reviews your offer.
- If accepted, continue monthly payments until the balance is paid in full.
Note: Low-income taxpayers may qualify for a waiver of the application fee and initial payment.
Step 4: Submit Your Application
Mail your completed application package, including all forms, documentation, and applicable fees, to the appropriate IRS address listed in the Form 656-B booklet. Alternatively, you may submit your application online through your IRS Individual Online Account.
Tips to Increase Your Chances of Acceptance
- Accuracy: Ensure all information provided is accurate and complete. Incomplete applications may be returned.
- Documentation: Provide thorough documentation to support your financial claims.
- Consistency: Maintain consistency between your forms and supporting documents.
- Professional Assistance: Consider consulting a tax professional for guidance.
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, it 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 are 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 24 months. 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
- Other IRS investigations are 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!