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Introduction
Do you need help with tax debt, which seems impossible? You’re not alone, and there’s a way to find relief! Through an Offer in Compromise (OIC), the IRS might allow you to settle your debt for much less than you currently owe—opening the door for you to regain control of your finances.
We understand the of getting your OIC approved can feel intimidating. That’s why we created this guide just for you! We’ll break down what precisely an OIC is and the critical information you’ll need to gather, and we’ll share some tried-and-true tips that can increase your chances of getting approved. And remember, if you find yourself needing extra help along the way, we’re here to point you in the right direction for support. Let’s take this journey towards a brighter financial future together!
What is an OIC?
An offer in compromise (OIC) is a provision in the federal tax code that allows you to settle your tax debts for less than you owe. You must a reasonable amount and meet certain preconditions. It’s a great alternative to consider if you can’t pay off your entire tax debt due to financial constraints.
An OIC represents a valuable opportunity for taxpayers to resolve their tax debts through a settlement with the IRS. To maximize your chances of qualifying for an OIC, you should ensure that you meet the criteria for applying to one of the three following programs:
- Doubt About Collectability: If the IRS accepts this OIC, they agree to settle all your tax debt for a single reduced amount. IRS has calculated what they think they can collect from you. The IRS calls this amount Reasonable Collection Potential. Your settlement offer must equal or exceed the Reasonable Collection Potential amount. The IRS will reject an offer of less than the Reasonable Collection Potential amount.
- Doubt About Liability: The taxpayer proves to the IRS that there is a legitimate reason the assessed tax debt is wrong. A common example would be when the taxpayer presents evidence not previously considered. A seemingly legitimate reason cannot compel the IRS to agree to review a case. The IRS does not have to accept an OIC application.
- Effective Tax Administration (Special Circumstances): You agree that the assessed tax debt is correct and that you could pay it. However, you prove to the IRS that collecting the total tax debt would create a significant economic hardship for you and your family. The IRS calls economic hardships ‘special circumstances. Inconvenience does not qualify as a hardship. The IRS refers to economic hardships such as Effective Tax Administration. You must collect, analyze, and present extensive supporting documentation to satisfy the IRS hardship guidelines.
What Factors Does the IRS Consider in Making an OIC Decision?
When you submit an OIC to the IRS, they carefully evaluate your financial situation. The IRS will accept an OIC if the offer amount is the most they can collect. Tax filings must be up to date to even be considered for the OIC process. You cannot file for bankruptcy during this period.
Here are the key factors they consider:
- Income: The IRS reviews all your income sources, including wages, self-employment earnings, and other income. This information is crucial for assessing your ability to pay off your tax debts.
- Expenses: The IRS examines your necessary expenses, which include housing costs, utilities, transportation, and food. They subtract necessary expenses from available income to the income available to pay your tax debt.
- Assets: The IRS evaluates the liquid net worth of your assets, such as bank accounts, real estate, vehicles, and investments. This value is available to settle your tax obligation.
- Ability to Pay: The IRS evaluates your overall financial situation. They determine whether it is possible for you to pay your tax debt in full through a payment plan or through other options.
- Proposed Settlement Amount: The IRS compares the amount you propose with what they believe you can realistically afford. Your offer must align with your financial situation.
After the IRS reviews these factors, they will decide whether to accept your Offer in Compromise. If accepted, you can resolve your tax debt for less than the amount you originally owed.
How Do I Qualify for Participation in the OIC Process?
To qualify for the OIC process, you must meet all of the following:
- You have filed all required tax returns.
- You are current on mandatory estimated payments for the current tax year.
- You have received a bill related to one or more tax debts you plan to include in your OIC.
- You are not actively involved in bankruptcy proceedings.
Business owners may also qualify, but you must ensure all federal tax deposits have been made.
How Do I Properly Submit an OIC Application?
Follow these steps to submit your OIC application:
- Gather all relevant financial information.
- Complete Form 433-A (Collection Information Statement for Wage Earners and Self-Employed Individuals) and attach any required documentation.
- Complete Form 433-B (Collection Information Statement for Businesses) and attach any required documentation.
- Fill out Form 656 (Offer in Compromise). The IRS must consider your proposed settlement amount reasonable. This form can help you decide on an suitable figure.
- Submit the application fee and your initial payment to the IRS using the Electronic Federal Tax Payment System (EFTPS). Or you pay by check. Note that you may qualify for a waiver of the application fee if you meet the Low-Income Certification guidelines.
- Make copies of all tax forms and supporting documents for your records.
- Send the original documents to the IRS.
What Are the OIC Payment Options?
Select one of these payment options when presenting your first OIC paperwork:
- Lump-Sum Cash Offer: This option requires paying 20% of the proposed settlement upfront. If the IRS accepts your OIC, you will pay the remaining balance in five payments or less.
- Periodic Payment Offer: This is a monthly payment you make until the debt is settled in full.
What Are Some Tips for Getting My OIC Approved?
The IRS has recently increased its collection effort for back taxes owed. But at the same time they provide the Offer in Compromise program to aid taxpayers who are experiencing genuine financial hardship. Statistics suggest that qualifying for the Offer in Compromise program is difficult. The IRS has historically accepted somewhere between one-quarter and one-third of presented offers. You can improve your chances by following these guidelines:
- Review your application for any mathematical errors or missing information.
- Ensure that your proposed settlement amount is reasonable.
- Submit all your tax returns.
- Avoid added tax debt during the OIC review.
- Immediately file an appeal if the IRS denies your first request. Send in Form 13711 (Request for Appeal of Offer in Compromise). By filing this document, the IRS may reconsider your first request.
- Complete all forms accurately. Pay the required application fee and non-refundable payment.
- Consider hiring a Certified Tax Resolution Specialist (CTRS)
Why Should I Hire a Certified Tax Resolution Specialist (CTRS)?
- Equipped For the Job: Submission of the OIC without the help of a tax resolution specialist decreases the chances of success. An experienced tax resolution specialist can help taxpayers qualify for an Offer in Compromise in many ways. Special OIC computer software analysis of taxpayers’ finances can strengthen the package. An experienced tax relief specialist also guides the taxpayer through the OIC process.
- Complying With All Follow-up Questions: The communication flow throughout the OIC process is extensive. The person best equipped to manage this flow is the tax resolution specialist. The experienced tax resolution specialist knows exactly how and when to provide the required information. The specialist can guide the taxpayer toward presenting the information correctly the first time by lessening the further need for information. The specialist can guide the taxpayer toward answering further questions quickly and correctly. A specialist is the taxpayer’s best method for communicating with the IRS.
- Treating IRS Employees with Professionalism: The success of an offer could depend on how you or your tax resolution representative treats the IRS employees. The taxpayer or their representative cannot choose who handles their OIC case. Treating the IRS employees connected with your case with respect will help everything stay on an even keel. Our experience has been that the IRS hires good people. These employees are usually eager to help the taxpayer resolve their tax problems in a positive and friendly manner.
- Meeting All Deadlines: The taxpayer should meet any deadline the IRS gives them directly or through the tax resolution representative. The taxpayer should allow plenty of time to meet these deadlines.
