Tax debts can be overwhelming, and the Internal Revenue Service (IRS) recognizes that not everyone can afford to pay their full tax liability. In such cases, the Offer in Compromise (OIC) program emerges as a potential solution, allowing taxpayers to settle their debt for less than the total amount owed. This article explores the intricacies of the OIC program, from eligibility criteria to the application process and possible outcomes.
Determining Eligibility and Preparation
Before delving into the Offer in Compromise process, it’s crucial to establish eligibility. You qualify if you have filed all required tax returns, made necessary estimated payments, are not in an active bankruptcy proceeding, and, if applying for the current year, have a valid extension. Employers seeking an OIC must have made tax deposits for the current and past two quarters.
To assess your eligibility and prepare a preliminary proposal, the IRS provides the Offer in Compromise Pre-Qualifier Tool. It’s a vital step to ensure that you meet the necessary criteria before proceeding.
Submitting Your Application
Once eligibility is confirmed, you can submit your Offer in Compromise application. The required forms and detailed instructions can be found in Form 656-B, the Offer in Compromise Booklet. The application package includes Form 433-A (for individuals) or 433-B (for businesses), along with all necessary documentation as specified on the forms. Additionally, you need to submit Form 656(s) for individual and business tax debt separately.
A non-refundable $205 application fee is applicable, along with an initial payment (also non-refundable) for each Form 656. The initial payment varies depending on your offer and the payment option chosen.
Payment Options and Low-Income Certification Guidelines
There are two primary payment options: Lump Sum Cash and Periodic Payment. With Lump Sum Cash, an initial payment of 20% of the total offer amount is required, with the remaining balance due in five or fewer payments upon acceptance. Periodic Payment involves submitting the initial payment with your application and paying the remaining balance in monthly installments while the IRS reviews your offer.
If you meet the Low-Income Certification Guidelines, you may be exempt from sending the application fee or the initial payment. Further details can be found in Form 656-B.
Understanding the Process and Possible Outcomes
While the IRS evaluates your offer, non-refundable payments and fees are applied to the tax liability. The IRS may file a Notice of Federal Tax Lien, suspending other collection activities and extending the legal assessment and collection period. It’s important to make all required payments per your offer, and existing installment agreement payments are not necessary.
If the IRS doesn’t make a determination within two years of the receipt date, your offer is automatically accepted, excluding any appeal period.
Conclusion
The Offer in Compromise program can provide much-needed relief for individuals facing challenging financial situations. However, it’s crucial to navigate the process carefully and consider alternative payment options before pursuing an OIC. If unsure, seeking the guidance of a qualified tax professional is advisable.
