Do you owe the Internal Revenue Service (IRS) more than you can afford to pay? You may be wondering if there is some sort of IRS tax forgiveness available. Unlike other debt, such as credit cards, it’s nearly impossible to have your entire tax balance wiped clean. There is, however, an option to settle your tax debt for less than you owe. Known as an Offer in Compromise (OIC), this program can give you a fresh start, but it’s far from guaranteed.
What is an Offer in Compromise?
An Offer in Compromise is an agreement between you and the IRS that allows you to pay less than the full tax amount originally owed. This is about as close as you can get to tax debt forgiveness. Generally, there are three reasons why the IRS would agree to a lesser amount:
- The amount owed is in question. Also known as “doubt as to liability”
- Paying the amount would cause a financial hardship
- Collecting the tax debt in full is unlikely
If the IRS receives an Offer in Compromise, it must give it fair consideration. Getting one approved, however, is a bit more complicated. To increase the odds in your favor, it’s best to ensure you are eligible and understand the application process.
Offer in Compromise Eligibility Requirements
Before you can submit an application for an Offer in Compromise, you must meet the following eligibility requirements:
- Be up to date on all tax return filings
- Make all required estimated tax payments for the current year
- Make all required federal tax deposits for the current quarter (if a business owner with employees)
- Receive a bill for at least one tax debt included in your offer
If you have unfiled tax returns or have not submitted the required payments/deposits, your application will be returned and not considered. Additionally, you are not eligible to apply for an OIC if any of the following are true:
- You’re in an open bankruptcy proceeding
- Your case was already sent to the Department of Justice (DOJ)
- You have an outstanding innocent spouse claim
- The IRS is currently auditing you
Once your innocent spouse claim or audit is complete, however, you may move forward with your OIC request.
The OIC Process
Once you determine that you are eligible to apply for an IRS Offer in Compromise, you can start the application process.
Along with the required Offer in Compromise forms, fee, and initial payment, you’ll also need to include any supporting documentation. Do not send original copies with the application.
Once you submit everything, you’ll need to be very patient. It can take quite some time for the IRS to approve or reject your offer. In the meantime, collection actions against you will be suspended until a decision is made. The IRS may still place a tax lien on your property, however, just in case your OIC is declined, or you fail to make the required payment. They also have the right to keep your tax refund and apply it to your outstanding balance.
If the IRS does not make a determination within two years of receiving your application, your OIC is automatically accepted.
IRS Offer in Compromise Payment Options
The IRS provides two options for paying through an Offer in Compromise:
- Lump Sum Payoff – You must include 20% of your offer amount when applying and pay in full within five months.
- Payment Plan – You’ll have up to 24 months to pay your offer amount in full. You must include the first payment with your application and continue to make monthly payments during the IRS review process.
Those who qualify for the low-income application fee waiver will not be required to make payments while the offer is being reviewed. Any payment sent with your application is non-refundable. If the IRS rejects your offer, the money will be applied to your outstanding tax bill.
Offer in Compromise Tips
Applying for an Offer in Compromise is fairly complicated, and it involves a lot of math. If you plan to go down this path with the IRS alone, be sure to follow these tips.
- Read the IRS Form 656 Booklet, Offer in Compromise
- Gather all necessary financial and tax documents
- Review all OIC forms for any errors or omissions
- Include copies of supporting documentation
- Sign all required forms
- Submit the necessary fees and payments
Do not submit an OIC if the statute of limitations (10 years) for collecting on your tax debt is nearly over. If you do, it will pause the clock and make your wait for relief even longer.
Not sure if you are eligible for an OIC? You easily can find out by using our free IRS Offer in Compromise Calculator.
If you’re feeling a bit overwhelmed with the Offer in Compromise process, we can help. Call Tax Defense Network at 855-476-6920 and receive a free consultation! Even if you’re not eligible for an OIC, we can help you find an affordable solution for your tax problem.