How to Negotiate an Offer in Compromise with the IRS: IRS Tax Debt Guide

Introduction to Offer in Compromise (OIC)

An Offer in Compromise (OIC) is a valuable IRS program designed to help individuals who are struggling with tax debt and facing financial hardship. Through the OIC process, eligible taxpayers can apply to settle their tax liability for less than the entire amount owed, providing a path to financial relief when paying the full tax debt is not possible.

To begin, taxpayers must submit an application to the IRS that includes detailed financial information about their income, expenses, assets, and overall ability to pay. The IRS carefully reviews this information to determine whether the taxpayer’s circumstances justify a compromise. The goal is to assess if the amount offered is the most the IRS can reasonably expect to collect, given the taxpayer’s financial situation.

If the IRS accepts the offer in compromise, the taxpayer is required to pay the agreed-upon amount, and the remaining tax debt is forgiven. This final decision can offer a fresh start, but it’s important to understand that the OIC process can be complex and requires careful documentation. Many individuals choose to work with a tax professional to ensure their application is complete and accurately reflects their financial hardship and ability to pay. By following the proper steps and providing thorough financial information, taxpayers increase their chances of having their offer accepted and resolving their tax debt for less than the full amount.

You might not be aware that the IRS offers an offer-in-compromise option for taxpayers who have been incorrectly assessed or whose total tax liability exceeds their ability to pay. This program enables customers to settle their taxes for less than the amount they owe.

Eligibility is based on your specific circumstances, such as your:

• Asset equity

• Expenses

• Income

• Ability to pay

An offer in compromise is generally accepted when the sum an individual offers represents the maximum the IRS may expect to recoup within a reasonable amount of time. This program is not open to everyone, and it entails a lengthy application procedure. It’s strongly suggested that you retain the services of an experienced tax attorney throughout every stage of the process, ensuring that no mistakes are made and that you have the best chance of having your offer accepted. It is important to hire a qualified professional who can help you navigate the Offer in Compromise process and IRS negotiations effectively.

What is offer in compromise?

An offer in compromise (OIC) is a settlement between a taxpayer and the IRS in which their tax liability is reduced to below the full amount. If you can make installment payments to pay off your tax debt, you won’t qualify. You must prove that you’re unable to make full payment and that the amount you offer is the most the IRS can reasonably expect to collect from you.

OICs are used as a means of collecting what is owed while also providing relief to taxpayers who cannot afford to pay their tax debt in full. The program is designed for those who have a genuine financial hardship and are unable to pay their tax liability over time through an installment agreement or other means. Taxpayers currently in an open bankruptcy proceeding are generally not eligible to submit an Offer in Compromise until the bankruptcy is resolved.

The three types of offers in compromises are:

Doubt as to Collectability – You offer an amount that you can pay now and the IRS agrees that this is all they can reasonably expect to collect from you.

Effective Tax Administration – There are extenuating circumstances that prevent you from paying your taxes, such as a natural disaster.

Doubt as to Liability – You don’t believe you owe all or part of the taxes in question.

To qualify for a doubt as to collectibility offer (the most common), a taxpayer must have:

• Filed all tax returns

• Made all required estimated tax payments for the current year

• If they are a business owner they have made all required federal tax deposits for the quarter

• Corporations and partnerships must file separate forms and follow specific procedures when submitting an Offer in Compromise.

• If the amount offered by the taxpayer is equivalent or greater than their reasonable collection potential (RCP), the IRS may accept an offer in compromise. RCP is how they determine whether or not a taxpayer can pay. It covers things like:

• Assets

• Real Property

• Cars

• Bank Accounts

• Owned Property

• Future Income

Form 656 is the primary form used to submit an Offer in Compromise. Form 656-B is the official IRS booklet that provides procedures and eligibility requirements for submitting an Offer in Compromise. All required forms, including Form 656 and Form 433-A (OIC) or 433-B (OIC), can be downloaded from the IRS website. An application fee is required when submitting an Offer in Compromise, and it must be included with your application unless you qualify for a low-income waiver. Individuals with low income may qualify for a waiver of the application fee or reduced payment requirements.

If you’re looking for a tax lawyer, Damiens Law Firm, PLLC is the firm to call. Our knowledgeable tax professionals at Damiens Law Firm, PLLC can help you determine if an offer in compromise is right for you or if a tax payment plan is preferable. We can provide sound advice about your circumstances because of our expertise in tax law.

Is an offer in compromise a good idea?

Any taxpayer who owes the IRS more than they can realistically pay off within a few months may be feeling overwhelmed and hopeless. They may have already fallen behind on their payments and be facing wage garnishment, levies, or even seizure of their assets. This is where an offer in compromise (OIC) comes in.

An OIC is an agreement between the taxpayer and the IRS that settles the taxpayer’s IRS tax liability for less than the full tax liability. It is important to note that not everyone qualifies for an OIC – the IRS will consider a number of factors, including the taxpayer’s income, expenses, and ability to pay, before making a decision. However, for those who do qualify, an OIC can provide much-needed relief from a crushing tax bill. By negotiating an OIC, the taxpayer can resolve their liability without having to declare bankruptcy or liquidate their assets.

Additionally, an OIC can help to avoid further penalties and interest from accruing on the outstanding tax bill. For taxpayers struggling to make ends meet, an offer in compromise may be the best way to get back on track and avoid economic hardship.

How to apply for the Offer In Compromise Program?

The IRS offers a variety of payment options for taxpayers who owe back taxes, but one of the most popular choices is an offer in compromise (OIC). The process of applying for an OIC can be complex, but it is well worth the effort for those who qualify. Here are four steps to help you get started:

1. Determine your eligibility. The first step is to determine whether you meet the criteria for an OIC. The IRS will consider factors such as your income, assets, and ability to pay before making a decision.

2. Gather your financial information. Once you have determined that you are eligible for an OIC, you will need to gather all of your financial information, including tax returns, bank statements, and pay stubs. This information will be used to determine how much you can afford to pay and included on your collection information statement to the IRS. You can use your individual online account on the IRS website to gather your tax filing status, make payments, and access the Offer in Compromise pre-qualifier tool. The IRS also provides an online tool to help you determine your eligibility for an Offer in Compromise by entering your financial information and tax filing status.

3. The next step is to submit your offer in compromise application along with all of the required supporting documentation. You must include an initial payment with your application, and periodic payments may be required while your offer is being considered. The IRS will conduct an investigation of your financial situation, and IRS employees may contact you by phone to request additional information or clarification during this process.

4. Negotiate with the IRS. The final step is to negotiate with the IRS in order to reach an agreement on the amount you will pay on the tax bill. Be prepared to compromise in order to reach a settlement that is acceptable to both parties.

Who qualifies for an IRS offer in compromise?

The offer process is complicated because it involves two hurdles: eligibility and approval from the IRS.  First, the taxpayer must prove that they qualify for an offer in compromise. The IRS will consider factors such as the taxpayer’s ability to pay, income, and expenses before making a decision. If the taxpayer does not meet the criteria for an offer in compromise, their application will be rejected. Even if the taxpayer does qualify, there is no guarantee that their offer will be accepted. The IRS will evaluate the taxpayer’s financial information and make a decision based on what they believe the taxpayer can realistically pay.

Alternative payment arrangements for IRS tax debt

When facing a significant tax debt, it’s essential to explore all available options to avoid unnecessary financial hardship. The IRS provides several alternative payment arrangements to help taxpayers manage their obligations. One of the most well-known options is the Offer in Compromise (OIC), which allows eligible individuals to settle their tax debt for less than the entire amount owed. This can be a lifeline for those who cannot afford to pay their full tax liability.

Another common solution is an Installment Agreement, which enables taxpayers to pay their tax debt over time through manageable monthly payments. This arrangement can help you stay current with the IRS while gradually resolving your entire tax debt. For those experiencing severe financial hardship, the IRS may grant Currently Not Collectible status, temporarily suspending collection activities if you are unable to pay anything at all.

To determine which option is best for your situation, you can use the IRS’s online tools, such as the Offer in Compromise Pre-Qualifier, to assess your eligibility. It’s important to ensure that all required tax returns are filed and estimated tax payments are made before applying for any arrangement. Consulting with a tax professional can help you navigate these options, understand the requirements, and choose the best path to settle your tax debt and regain financial stability.

---

How long does an offer in compromise take?

Offer / Term Time may vary depending on your personal circumstances but is typically 4 to 9 months. The sooner the IRS is able to determine whether it can accept the Compromise Offer, the greater the chances of it being accepted.

How the IRS decides whether to accept an offer in compromise

The IRS calculates the amount it believes can be collected from an individual now and in the future. The Internal Revenue Service uses information about taxable income to calculate RCPs such as future income (See, IRS Allowable Living Expenses). The IRS will accept the offer if there is a difference between the RCP and the amount of money you offer. If there is a legitimate legal dispute as to whether your tax liability really exists, then you will need to review the qualifications for doubt as to liability offer in compromise.

Tell me the acceptance rate.

The IRS publishes data on the number of offers it accepts and rejects each year. For example, in 2018, the IRS accepted 19,718 offers out of 62,135 offers submitted. This represents an acceptance rate of 31.8%.

How much should I offer? Minimum offer amount and reasonable collection potential

You can use the IRS’s online tool to calculate a preliminary offer and estimate your preliminary offer amount before submitting your application.

The minimum amount you should offer depends on what kind of offer or payment option the IRS accepts. The IRS will review your income potential as well as your net realizable equity in assets in determining your offer’s viability. In most cases, the IRS will accept an offer if it reflects your reasonable collection potential and is supported by your financial information.

Net realizable equity in assets

The net realizable equity on assets is calculated from the fair market price of the property multiplied by the discount factor or 80%. The balance of the loan backed by the property should also be taken into account. Net realizable asset value varies according to the type of asset in question.

For example, if your car is worth $5,000 and you owe $3,000, your net realizable equity would be $2,000. If you’re able to offer this amount or more, the IRS may accept your offer.

Options for rejected offers

If your offer is rejected, it may be due to an error by IRS staff or other reasons. There are two options when a taxpayer’s OIC is denied. The first is to file an appeal within 30 days of the date on the Notice of Disallowance. The second option is to submit a new offer with a higher payment.

Outcome and benefits of an accepted offer in compromise

If the IRS accepts your Offer in Compromise (OIC), you can resolve your tax debt for less than the full amount owed, providing significant financial relief. An accepted OIC means the IRS will stop all collection activities, such as levies and wage garnishments, giving you peace of mind and a fresh start. Additionally, interest and penalties on your tax debt will no longer accrue, and you can avoid the risk of bankruptcy.

To achieve this outcome, you must submit a complete application using Form 656, along with detailed financial information on Form 433-A (OIC) or Form 433-B (OIC), depending on your filing status. The IRS will carefully review your financial information, including your income, expenses, assets, and debts, to determine your ability to pay and whether there is doubt as to liability. The final decision is based on your unique circumstances and the information provided in your application. For more on related IRS forms, see this comprehensive guide to IRS Form 433-F.

Once your OIC is accepted, you are required to comply with all terms of the agreement. This includes making all required payments on time and staying current with your tax filings and payments for the next five years. IRS tax liens are typically released once the full offer amount has been paid, meaning the lien is removed after payment is completed. If you fail to meet these requirements, the IRS may revoke the compromise and reinstate the original tax debt, including any penalties and interest. If you are in bankruptcy, IRS debts may be reviewed during the proceedings, which can affect the outcome of your OIC.

Taxpayers can use the IRS’s Offer in Compromise Booklet and other online resources to guide them through the OIC process and ensure they meet all requirements. With a successful OIC, you can settle your tax debt, avoid further penalties, and move forward with your financial life.

Next Steps After an Offer in Compromise Decision

After the IRS makes a decision on your offer in compromise, it’s important to take the right steps to protect your financial future and ensure compliance with the terms of the compromise. If the IRS accepts your offer, you must pay the agreed-upon amount according to the payment schedule outlined in your compromise agreement. It’s crucial to make all required payments on time and to stay current with your tax filings and payments for the next five years. Failing to meet these requirements could result in the IRS revoking the compromise and reinstating your original tax debt, including any penalties and interest.

If your offer in compromise is not accepted, don’t be discouraged. You have options, such as appealing the decision or submitting a new offer with updated financial information. Review the IRS’s explanation for the rejection and consider consulting a tax professional to strengthen your next application. In some cases, alternative arrangements like an installment agreement or Currently Not Collectible status may be available to help you manage your tax debt.

No matter the outcome, it’s essential to respond promptly to the IRS’s decision and continue communicating with them to resolve your tax liability. Taking proactive steps after your offer in compromise decision can help you move forward and regain control of your financial situation.