What is an IRS Offer in Compromise

In today’s blog, we’ll delve into IRS Offers in Compromise (OIC). 

What is an IRS Offer in Compromise?
An IRS Offer in Compromise (OIC) is a method to negotiate a settlement with the IRS for a sum less than the total tax debt owed. It’s a way for taxpayers to potentially reduce their liability. 

 There are three primary types of Offers in Compromise: 

• Doubt as to Collectability: This is the most frequently used option, where taxpayers argue they cannot pay the full amount. It represents the majority of accepted offers. 

• Doubt as to Liability: In this case, the taxpayer believes they don’t owe the debt but cannot reach an agreement with the IRS. 

• Effective Tax Administration: This occurs when a taxpayer could technically pay the full balance, but doing so would create undue hardship, like severe financial strain. 

Since Doubt as to Collectability is the most common and often the most successful OIC, our focus will be on this type. 

Key Considerations Before Submitting an OIC to the IRS: 

1. Ensure Compliance with Tax Filing Requirements.
   Before the IRS even considers your Offer in Compromise, you must have filed all required tax returns. If there are any unfiled returns, get those sorted first. Without this, your submission won't even be reviewed. 

2. Leverage the IRS Pre-Qualifier Tool.
   After catching up on your filings, use the IRS Pre-Qualifier tool. This tool helps determine if the IRS might accept your offer. It’s wise to use it before proceeding—if the IRS thinks you can pay the full debt, submitting an OIC could be futile. 

3. Complete the Necessary IRS Forms.
   Once you have an idea of your chances, fill out the IRS OIC paperwork—specifically, the IRS Form 656 Offer in Compromise Booklet. This form digs into your financial details, like the equity in your assets, income, and expenses. Be thorough; incomplete forms may be rejected outright or returned for correction, causing delays. 

4. Choose Your Payment Method.
   When submitting an OIC, decide if you want to make a 20% down payment or opt for a periodic payment plan. The former requires a one-time payment of 20% of the offer amount, while the latter involves monthly payments during the evaluation period. 

5. Exercise Patience.
   Processing an OIC can take six to nine months. Your case will be assigned to an IRS Settlement Officer, who will review your situation and may ask for updated financial documents. If your offer is accepted, you’ll receive a conditional acceptance letter, with a five-year compliance requirement. This means staying up-to-date on future filings and payments. 

What if the IRS Rejects Your Offer in Compromise?
You have the right to appeal an OIC rejection within 30 days. Appeals are reviewed by the IRS OIC Appeals unit. Filing through a collection due process hearing can also be strategic—it preserves your right to take the case to Tax Court if appeals are unsuccessful. 

With a careful approach and an understanding of the intricacies of the OIC process, settling your tax debt for less than owed can become a realistic possibility. 

If you are still unsure about your situation, and want expert advice, you can click this link to set an appointment to speak with a Tax Expert from Lisa Brugman, EA & Associates.