Offer in Compromise: An offer in compromise (OIC) is a settlement agreement between a taxpayer and the Internal Revenue Service in which the taxpayer’s tax liabilities are settled for less than the full amount owing.
In most circumstances, taxpayers who can fully settle their bills through an installment plan or other means will not be eligible for an OIC. Refer to Topic No. 202 for information on tax payment options, including installment agreements.
To be eligible for an OIC, the taxpayer must have filed all tax returns, received a bill for at least one tax debt included in the offer, made all required estimated tax payments for the current year, and made all required federal tax deposits for the current quarter and the two preceding quarters if the taxpayer is a business owner with employees.
The IRS will usually reject an OIC unless the amount offered by the taxpayer is equivalent to or greater than the IRS’s reasonable collection potential (RCP). The RCP is the IRS’s method of determining a taxpayer’s ability to pay.
The RCP takes into account the value of the taxpayer’s assets, such as real estate, automobiles, bank accounts, and other property. Aside from property, the RCP contains expected future income, less certain sums set aside for essential living expenditures.
Justifications for the Offer
An OIC may be accepted by the IRS for one of the following reasons:
- First, if there is a question about liability, the IRS can accept a compromise. Only when there is a genuine disagreement about the existence or amount of the correct tax debt under the law does a compromise meet this condition.
- Second, if the IRS is unsure whether the debt is entirely recoverable, it can accept a compromise. When the taxpayer’s assets and income are less than the whole amount of the tax liability, there is a question of collectibility.
- Third, the IRS is willing to accept a compromise if it is based on good tax administration. When there is no dispute that the tax is lawfully owing and that the entire amount owed can be collected, an offer may be accepted based on effective tax administration, but requiring a full payment would either cause economic hardship or would be unfair and inequitable due to unusual circumstances.
Offer in Compromise Eligibility Criteria
An offer in compromise permits you to pay less than the full amount of your tax bill. If you are unable to pay your full tax debt or if doing so would put you in financial hardship, it may be a viable choice. We take into account the following facts and circumstances:
- Financial ability to pay
- Income and
- Equity in a company’s assets
When the sum you offer is the most we can hope to collect in a reasonable amount of time, we usually approve an offer in compromise. Before submitting a compromise offer, look into all alternative payment choices. Not everyone is a good fit for the Offer in Compromise program.
Check the qualifications of any tax professional you employ to assist you in filing an offer.
With the Offer in Compromise Pre-Qualifier Tool, you may confirm your eligibility and develop a preliminary proposal.
If you meet the following criteria, you may be eligible for an Offer in Compromise:
- I filed all of my tax taxes and made all of my projected payments on time.
- Aren’t you in the middle of a bankruptcy case?
- Have a valid extension for this year’s tax return (if applying for the current year)
- Before you apply, you must be an employer who has made tax deposits for the current and previous two quarters.
If You Apply and Aren’t Accepted
If we are unable to process your Offer in Compromise application, we will:
- Return your application and include a fee.
- Apply any offer payments you made to your outstanding debt.
Terms While The IRS considers Offer
- Payments and levies that are not refundable are applied to your tax liability (you may designate payments to a specific tax year and tax debt)
- The Internal Revenue Service (IRS) may submit a Notice of Federal Tax Lien.
- Other IRS collection efforts have been halted.
- The time limit for legal evaluation and collection has been extended.
- You make all needed payments in accordance with your agreement.
- You are not obligated to pay on an existing installment agreement.
- If the IRS does not make a decision within two years of the IRS receipt date, your offer is automatically accepted (This does not include any Appeal period.)
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Useful Forms To Apply OIC
Taxpayers must use the most recent version of Form 656, Offer in Compromise, and also submit Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals, and/or Form 433-B (OIC), Collection Information Statement for Businesses, when submitting an OIC based on doubt about collectibility or effective tax administration.
Instead of Form 656 and Form 433-A (OIC) and/or Form 433-B (OIC), a taxpayer filing an OIC based on doubt as to responsibility must file a Form 656-L, Offer in Compromise (Doubt as to Liability)PDF (OIC). The Offer in Compromise Booklet, Form 656-BPDF, contains Form 656 and referenced collecting information statements.
Fees for Applications of OIC
A taxpayer must generally submit an application fee in the amount specified on Form 656. This fee should not be combined with any other tax payments. There are, however, two exceptions to this rule:
- First, if the OIC is based on a question of liability, no application fee is necessary.
- Second, if the taxpayer is an individual (rather than a company, partnership, or other organization) who qualifies for the low-income exemption, the charge isn’t required. Qualifying can be accomplished in one of two ways.
- The first is that the individual’s adjusted gross income falls at or below 250 percent of the poverty criteria set by the Department of Health and Human Services for the most recent taxable year for which such information is available.
- The second is that the household’s gross monthly income x 12 months is at or below 250 percent of the Department of Health and Human Services’ poverty levels.
- The Low-Income Certification standards are included in section 1 of Form 656 for both choices to help taxpayers determine whether they qualify for the low-income exception. If you’re claiming the low-income exemption, fill out section 1 of Form 656 and check the certification box.