Offer in Compromise (OIC) allows taxpayers to settle their tax debt for a reduced amount owed. There are certain criteria you need to meet when settling a tax bill. Here’s a simple guide for your reference.

Eligibility Criteria

The IRS approves an OIC if the offered amount is the most it can collect within an acceptable period.

• Ability to Pay: The IRS evaluates your income, expenses, and asset equity. These factors determine your ability to pay.
• Income: Your existing and future earning potential are assessed.
• Expenses: The IRS follows standard expense guidelines. They will take into account your situation as well.
• Asset Equity: The value of your property and investments bears weight.

Types of OIC

• Doubt as to Liability: The first scenario is that you do not owe the entire amount. The second instance involves a dispute over the accuracy of the tax due.
• Doubt as to Collectibility: You are not able to pay the entire amount owed. Selling all of your assets and exhausting all means remain insufficient.
• Effective Tax Administration: Paying the whole sum would result in financial strain.

Filing an Offer in Compromise

Step 1: Complete Forms

• Form 656: Use this Offer in Compromise application form to propose the amount you can pay.
• Form 433-A (OIC) or 433-B (OIC): List all your income, expenses, assets, and liabilities in this comprehensive financial statement.

Step 2: Calculate and Submit Your Offer

• Offer Amount: The offer is equivalent to your net realizable equity (assets). Consider what you can afford to pay in the next 12-24 months.
• Initial Payment: Include an initial payment with your OIC application.
  • Lump Sum Payment: You are required to pay 20% of the offer amount upfront.
  • Periodic Payment: The upfront fee is the first monthly payment. This is for installments over 24 months.

• Mail the completed forms, the initial payment, and the application fee to the IRS. The address is listed on the instructions. The application fee is $205. Low-income applicants may waive the fee. Check the criteria for eligibility.

After Submission

• IRS Review: The IRS takes months to process your offer. The statute of limitations on the collection of your tax debt is suspended.
• Negotiations: The IRS may negotiate the conditions of the offer or require additional paperwork. Sometimes they require an increased payment.

Possible Outcomes

• Accepted Offer: Comply with the terms of the IRS. This involves paying on time. File and pay all required taxes on time for the next five years.
• Rejected Offer: Appeal the rejected offers within 30 days. Use Form 13711, “Request for Appeal of Offer in Compromise.”

Resources

• IRS Offer in Compromise Pre-Qualifier Tool: Use the IRS tool to see if you might qualify for an OIC: Offer in Compromise Pre-Qualifier
• Form 656: IRS Form 656
• Form 433-A (OIC): IRS Form 433-A (OIC)

Stay compliant with all tax laws. Noncompliance may result in a voided OIC agreement. The IRS will reinstate the full debt amount, minus any payments already made. Consult with a tax professional or a tax attorney for more accurate information about settling your tax bill.