Do you owe money to the IRS? Taxpayers who can’t fully pay off their liabilities on their current or past tax return(s) may qualify for an “Offer in Compromise (OIC).” Man with headacheAn OIC is an agreement between the taxpayer and the IRS to settle the taxpayer’s liabilities for less than the full amount owed. If the IRS accepts the OIC and the taxpayer fully complies with the agreement, the outstanding liabilities specified in the agreement are resolved. An OIC may be a good option for a taxpayer who can’t pay the full tax liability, or where doing so would create a financial hardship.

In determining whether to accept an OIC, the IRS considers the following facts and circumstances:

  1. Ability to pay;
  2. Income;
  3. Expenses; and
  4. Asset equity.

Offers are generally accepted by the IRS when the amount offered is the most the IRS can expect to collect from a taxpayer within a reasonable period of time.

Eligibility Requirements

To be eligible for an OIC, a taxpayer must be current with all filing and payment requirements. Required returns must be filed and estimated tax payments for the current year as well as required federal tax deposits for the current quarter if applicable must be paid.

Submitting an Offer

Submit a reasonable offer, which is based on the taxpayer’s assets and the future income (less basic living expenses). Be aware that the IRS usually conducts an intensive review of a taxpayer’s current financial status before considering acceptance of an OIC. For more detailed instructions on submitting an offer, please see the IRS Offer in Compromise Booklet. It is important to note that while an offer is pending, a Notice of Federal Tax Lien may be filed, but all other collection activities are suspended.

If the Offer is Accepted

If the IRS accepts the OIC, the taxpayer can pay in a “lump sum,” which requires an initial payment of 20 percent of the total offer amount with the application. Once accepted, the remaining balance is payable in 5 or fewer installments. In the alternative, the taxpayer can opt for “periodic payment,” which includes an initial payment with the application and monthly installments while the IRS considers the offer and once accepted until the offer amount is paid in full. Note that there are nonrefundable fees associated with both payment methods, but if the offer in compromise is accepted by the IRS, the fees will be applied to the outstanding tax liabilities.

If the Offer is Rejected

A taxpayer may appeal a rejection within 30 days by filing a Request for Appeal of Offer in Compromise.

Summary

Where taxpayers filed their tax returns, but are legitimately unable to pay their liabilities without undue hardship, the IRS is willing to reasonably compromise.

If you owe taxes, contact us to find out if an Offer in Compromise is right for you.