How to Apply for an IRS Offer in Compromise: A Guide to Tax Debt Relief
Tax debt can be difficult to resolve with the IRS. An Offer in Compromise (OIC) lets eligible taxpayers settle a tax liability for less than the full amount when full payment is not realistic. This guide summarizes eligibility, the application steps, and common pitfalls, and explains how legal help can improve outcomes.
Beyond inability to pay, the IRS may consider other grounds for compromise, such as the Effective Tax Administration (ETA) criterion, which can permit settlement even when full payment is technically possible.
Effective Tax Administration (ETA) Criterion for IRS OIC
Under the ETA criterion, the IRS may strike a compromise with a taxpayer if the compromise would promote effective tax administration, even if the taxpayer could technically pay the full amount. However, the IRS’s position of not permitting nonhardship ETA offers for penalties and interest can be a point of contention.
The IRS Offer-in-Compromise Program: How Should the IRS Apply the Effective Tax Administration Criterion, 2004
What Are the Eligibility Requirements for an IRS Offer in Compromise?
To qualify, taxpayers must meet specific eligibility criteria. Understanding these rules helps you decide whether an OIC is a realistic option.
Who Qualifies for IRS Tax Debt Relief Through OIC?
Individuals and businesses may qualify if they can demonstrate an inability to pay the full liability. The IRS looks at income, necessary living expenses, and asset equity for individuals; businesses must show that full payment would cause hardship. Typical circumstances include:
- Low Income: Limited income relative to expenses.
- Financial Hardship: Significant expenses or loss of income (for example, medical bills or job loss).
- Asset Limitations: Equity in assets is insufficient to cover the liability.
See referenced resources for more on how the IRS measures ability to pay and other relief options.
IRS Factors for OIC Ability to Pay & Taxpayer Options
This article describes the factors used by the IRS to determine a taxpayer’s ability to pay and outlines the various options available for taxpayers who simply cannot pay the IRS, including Offers in Compromise.
Offers in Compromise to the IRS, 2011
What IRS OIC Requirements Must Be Met?
The IRS requires several conditions before considering an OIC, including:
- Filing Compliance: All required returns must be filed.
- Current Tax Compliance: You must be current with required estimated payments for the year and not in an open bankruptcy.
- Financial Disclosure: Full disclosure of income, expenses, and assets is required.
Meeting these conditions preserves eligibility and moves the application forward.
Not all OIC types require a fee; the “Doubt as to Liability” (DATL) OIC, for example, generally does not require an application fee and can correct assessments.
Doubt as to Liability OIC: No Application Fee Required
No deposit or application fee is required. The DATL OIC is a powerful tool for correcting IRS assessments, and its proper utilization can provide significant relief to taxpayers facing unmanageable tax liabilities.
Doubt as a Liability Offer in Compromise; an under-Utilized Tool for Correcting IRS Assessments, 2018
What Is the Step-by-Step Process to Apply for an IRS Offer in Compromise?
Applying for an OIC requires careful preparation and adherence to IRS procedures.
- Determine Eligibility: Review your finances to confirm you meet OIC criteria.
- Complete IRS Form 656: Fill the form accurately to avoid delays.
- Gather Required Documentation: Collect proof of income, expense records, and asset information to support your claim.
Legal consultation can be valuable; law firms specializing in tax law can help ensure submissions are complete and accurate.
How Do You Complete IRS Form 656 Correctly?
Key Form 656 sections to focus on include:
- Personal Information: Verify names, SSNs, and addresses.
- Offer Amount: State the payment you propose clearly.
- Reason for Offer: Give a concise explanation of why full payment is not possible.
Errors such as incomplete entries or miscalculations can delay or derail an application.
What Documentation Is Required for the OIC Application?
Your application should include:
- Proof of Income: Pay stubs, tax returns, or other income records.
- Expense Documentation: Bills and statements showing monthly living costs.
- Asset Information: Bank statements and valuations for property or other assets.
Complete, verifiable documentation is essential to support the offer and obtain IRS review.
What Are Common Reasons for IRS Offer in Compromise Denial and How Can You Avoid Them?
Knowing frequent causes of denial helps you strengthen your application and avoid preventable mistakes.
Why Are Some OIC Applications Rejected?
Common reasons include:
- Incomplete Applications: Missing required information or documents.
- Inability to Pay: The IRS determines you can pay in full or through an installment plan.
- Failure to Meet Eligibility Requirements: Missing filing or compliance conditions.
- Failure to Make Required Payments: Required payments not made while the offer is pending.
How Can Legal Representation Improve Your OIC Success?
A tax attorney can increase the chance of a favorable determination by:
- Expert Guidance: Explaining options and procedures.
- Increased Accuracy: Ensuring forms and documents are correct.
- Negotiation Skills: Communicating with the IRS and advocating for better terms.
How Does an IRS Offer in Compromise Compare to Other Tax Debt Settlement Options?
Compare OIC terms and requirements against alternatives to choose the best path for your situation.
What Are the Differences Between OIC and IRS Payment Plans?
When Is an OIC the Best Choice for Tax Debt Resolution?
An OIC is often best when:
- Significant Financial Hardship: Paying in full would cause undue strain.
- Limited Assets: Equity is far less than the tax liability.
- Desire for Resolution: You want a potential reduction in total owed, accepting that approval can take months.
Evaluate these factors to decide whether an OIC is appropriate for resolving your taxes.
Frequently Asked Questions
What is the typical timeline for an IRS Offer in Compromise application?
Processing varies by complexity and IRS workload; reviews often take several months to about a year. Maintain filing and payment compliance and respond quickly to IRS requests to avoid delays.
Can I appeal if my Offer in Compromise is denied?
Yes. You can request reconsideration in writing, generally within 30 days of the denial. Review the denial reasons and consider legal help to address them.
Are there any fees associated with submitting an Offer in Compromise?
There is generally a non-refundable application fee with Form 656 unless you qualify for a low-income waiver. Lump-sum offers may also require an initial payment with the submission.
What happens if I miss a payment during the OIC consideration period?
Missing a required payment can lead to automatic rejection. Keep required payments current while the IRS reviews your offer; contact the IRS promptly if you foresee difficulty.
Can I submit multiple Offers in Compromise at the same time?
No. The IRS normally accepts only one offer per tax liability at a time. If circumstances change materially, you can withdraw an offer and submit a revised one.
How does the IRS determine the offer amount I should submit?
The IRS uses your income, allowable expenses, and asset equity to calculate an offer amount, estimating disposable income and realizable asset value. Provide accurate documentation so the offer reflects your true ability to pay.
