Offer in Compromise: Settle Back Taxes for Less through an OIC

Offer in Comprise: Settle for Less

Offer in Compromise, Form 656An Offer in Compromise, or OIC, is an agreement by the IRS with a taxpayer to settle IRS tax debt for less than the actual amount owed. An IRS Offer in Compromise is commonly known as the "pennies on the dollar" deal. However, it's important to note that only a small percentage of taxpayers actually qualify for an Offer in Compromise. That's right. You must qualify for an OIC. You are not automatically given an Offer in Compromise to settle your back taxes just because you asked for it.

Offer in Compromise: Who Qualifies?

Each year, the IRS typically accepts 20-25% of the OIC applications submitted. So who has a better chance of being accepted for an Offer in Compromise? The IRS uses a precise mathematical formula to determine who can settle their back taxes for less, but here's a simple checklist for you.

  • Doubt as to Collectibility: Can you show that it is unlikely that your entire tax debt amount will be paid in full before the statute of limitations ends? For example, are you living paycheck to paycheck with no disposable income after covering your basic necessities? Do you not have any assets to sell that could be applied towards your tax debt?
  • Doubt as to Liability: Can you prove that the tax debt itself is incorrect or unjust? For example, if you were audited but the examiner made a mistake interpreting the law and assessed an incorrect tax debt amount, you would be eligible for an OIC.
  • Effective Tax Administration: Do you admit the tax debt amount is correct and justified, but paying it off in either a lump sum or monthly payment plan would cause financial hardship? Note that financial hardship is not the same thing as an inconvenience. In order to be accepted for an IRS Offer in Compromise, you must prove that paying your back tax debt would affect your ability to pay for housing, groceries, and other basic necessities.
Do you qualify for an Offer in Compromise? Start Here!

Applying for an Offer in Compromise

To submit your application for an OIC, use Form 656, Offer in Compromise from the official IRS website. You will need to include 20% of your settlement offer with your application. This is nonrefundable. If your Offer in Compromise application is denied, your 20% payment will be put towards your tax debt.

Updates to the Offer in Compromise Program

In February 2011, the IRS announced a new streamlined update to the OIC, to allow more taxpayers to be eligible to settle back taxes for less.

  • Taxpayers with an annual income of $100,000 or less can apply.
  • Tax debt amounts of $50,000 or less are eligible. The previous maximum was $25,000.

Be clear that this does not mean that being accepted for an IRS Offer in Compromise is easier. This only means that more taxpayers are eligible; the Doubt as to Collectibility, Doubt as to Liability, and Effective Tax Administration detailed above still stand.

Expert Tax Help When Applying for an Offer in Compromise

Full financial disclosure is required when you apply for an Offer in Compromise. The IRS uses this information to determine if you can actually afford to pay more than the settlement you're offering. This means that if your OIC application is rejected, the IRS now has full access to all of your financial information, leaving any and all of your assets vulnerable to a federal tax lien. For this reason, it may be in your best interest to work with a tax debt professional when you're considering applying for an IRS Offer in Compromise. A true tax debt professional will review your records and determine if you should even apply for an OIC, sparing you unnecessary application fees and full financial disclosure.

If you're considering applying for an Offer in Compromise, contact today. We'll connect you with a team of tax professionals that will help you determine if an IRS Offer in Compromise is the best solution to help you settle back taxes.

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