Offer In Compromise: Complete Guide to Settle your Tax Debt with IRS
Tax Debt is just like torture to taxpayers. Especially, when a person meets with financial hardships and he/she can’t pay taxes which cause huge tax liabilities.
But Don’t be Panic, IRS offers an agreement that could be the solution to settle your tax debt when you can’t afford to pay your tax debt. This Tax Debt Relief Program has an option, known as “Offer in Compromise (OIC)”, through this program one can make their Debt forgiven.
What is Offer in Compromise (OIC)?The Offer in Compromise (OIC) is an IRS program in the United States, which allows settlement to qualified taxpayers to lessen their tax liabilities by paying less than the total amount owed to clear the debt.
Types of OIC:The IRS may accept an offer in compromise to qualify a taxpayer based on one of the following reasons:
Doubt as to Collectability (OIC-DATC)
This is the most common type of offer in compromise. A compromise meets this criterion when a taxpayer can show the reason that he/she doesn’t have the ability to fully pay the liability and his/her income is less than the amount of the tax debt.
Doubt as to liability (OIC-DATL)
A compromise meets this criterion only when a taxpayer can show the reason that the amount of the tax liability is correct under the law. Possible reasons to submit this offer include:
- The mistake in interpreting the law
- Failed to study taxpayer’s evidence
- The taxpayer has new evidence.
A compromise meets this criterion when the taxpayer doesn’t challenge liability or collectibility but can show the reason that the collection of the tax would lead to financial hardship or it would be unfair
Payment Options:Taxpayers may choose one of two payment options to pay their offer in compromise by submitting Form 656 with the initial payment and application fee. These payment options are:
Lump Sum Cash Offer
This option offers taxpayers to pay a lump sum or installment in five months or less. You have to submit your payments within five or fewer months after the date approved by the IRS. You must submit a 20% initial payment with the application fee.
Note: The initial payment of 20% is non-refundable even offer is accepted or rejected. You will get a confirmation if your offer is accepted.
Periodic Payment Offer
This option offers taxpayers to pay in installments of six months or more and within two years after the offer/date approved by IRS. This offer also requires the first proposed installment payment with the application fee. If your offer will be accepted, then you can pay monthly installments. This offer is further divided into two categories:
- Short Term Periodic Payment Offer – The amount paid within 2 years of the date approved by IRS.
- Deferred Periodic Payment Offer – The amount paid during the remaining legal period to collect the tax.
More Information About PaymentsAt the time of filing an offer in compromise application, you must attach two separate payment checks, one is for the application fee and the other for the initial payment, to the United States Treasury
In general, $186 is the required application fee for the offer in compromise
Note: In case the offer is approved, if the OIC is based on doubt as to liability and who claims and meet the low-income level, it will waive the application fee and the 20% down payment.
Forms You Need to Submit OIC:
- Form 433-A (OIC) – For individual Wage Earners and Self-Employed
- Form 433-B (OIC) – For businesses (Corporations, Partnerships, and single-member LLCs)
- Form 656 – For individual and business tax debt (If OIC based on doubt as to collectibility or effective tax administration) with Form 433-A for individual and Form 433-B for Businesses
- Form 656-L – For individual and business tax debt (If OIC based on doubt as to liability) with Form 433-A for individual and Form 433-B for Businesses
Other Required Documents for offerWhile submitting the forms, you need to submit copies of other important documents with them. The list of documents is mentioned at the last of each form. It mostly comprises proof for the last three months of all documents. These documents are:
- Proof of Income/wages
- Bank/Credit card statements
- Statements of Mortgage/real estate you own
- Statements for insurance from the insurance company
- Investment statements
- Health care Expenses statements
- Childcare Expenses
- Household Expenses (rents, Mortgage records, etc.)
- Transportation Expenses or Car loan statements (car payments, public transportation costs, etc.)
- Other expenses (groceries, utility bills, etc.)
- All tax returns copies for the years related to the tax debt
- Court Ordered Payments (in case of child support to a former spouse)
Eligibility Criteria for an OIC:IRS might consider you eligible for an offer in compromise if you meet with these three reasons:
- You can prove to IRS that paying the full amount of tax debt would cause you economic hardship.
- You don’t have the income or you can’t afford the full amount to pay the full tax debt before the end of the 10 years statute of limitation.
- If you have a doubt over the amount you really owe of the tax.
Eligible taxpayers must have these to qualify:
- Have filed all required tax returns and estimated tax payments for the current year
- Be up-to-date with all current filing and payment requirements like estimated tax payments and federal tax deposits (if the taxpayer is a business owner with employees).
- Not involve currently in an open bankruptcy proceeding.
How to check Eligibility?OIC is hard to process, whether you qualify for this offer or not your 20% down payment is non-refundable and also you have to show your financial information to IRS at the first. Most people don’t want to share their financial information with IRS, so they have to check their eligibility first by themselves. For this, they can use IRS Offer in Compromise Pre-Qualifier To make sure their eligibility and also prepare a preliminary proposal.
The process to apply for an OIC:If you are eligible for OIC, follow these steps to apply for the offer:
Step 1: Complete the Form 656 with Form 433-A (OIC) for individuals (if applicable) and Form 433-B (OIC) for businesses (if applicable).
Step 2: Attach Required Documents
Step 3: Pay the application fee which is $186
Step 4: select a payment option for Initial payment
Step 5 – Mail the Application to IRS
What’s Next If your offer is Rejected?If your offer is rejected by IRS (notified by mail), you can appeal within 30 days from the date of the rejection letter, by submitting Form 13711 to request for Appeal of Offer in Compromise. This letter will explain the reason for OIC rejection.
What’s Next If your offer is Returned?If your OIC is returned to you rather than rejected by the IRS. In that case, you don’t need to submit any appeal of OIC. This issue can be caused by submitting an incomplete or improper application like not pay the fee, filed for bankruptcy, etc., so you have to resubmit OIC after making corrections.
Dealing with IRS to settle your Tax debt is not an easy task. IRS has made this process very hard to qualify for the deserving person, so applying for Offer in Compromise is very tough to do it alone. You will need to get help from a licensed Accounting Firm. They have better knowledge to analyze the situation and can suggest you the better option to forgive your Tax Debts without revealing your finances to the IRS.