Offer in Compromise

A Lifeline for Taxpayers: Understanding the Offer in Compromise Program

Struggling with tax debt can be an overwhelming experience, leaving many taxpayers feeling as though they're drowning with no lifeline in sight. However, the Internal Revenue Service (IRS) offers a glimmer of hope through its Offer in Compromise (OIC) program. This program allows qualified individuals to settle their tax debts for less than the full amount owed, providing much-needed relief and a fresh start. In this article, we'll dive deep into the intricacies of the OIC, exploring its benefits, eligibility criteria, and the process involved in submitting an offer.

What is an Offer in Compromise?

An Offer in Compromise is a program offered by the IRS that allows taxpayers to settle their tax liabilities for less than the full amount owed. This option is available to individuals and businesses alike and is intended for those who are unable to pay their full tax liability, or doing so would create financial hardship. The IRS considers the taxpayer's income, expenses, asset equity, and ability to pay when determining whether to accept an OIC.

Eligibility Criteria for an Offer in Compromise

Not everyone is eligible for an OIC, and the IRS has strict guidelines to determine who qualifies. To be considered, taxpayers must meet the following criteria:

• All tax returns must be filed – You cannot have any unfiled tax returns.
• All required estimated payments for the current year must be made – If you are a business owner with employees, this includes making all required federal tax deposits.
• No open bankruptcy proceedings – You must not be in an active bankruptcy proceeding.

Additionally, the IRS will only accept an offer if it believes that the offer is equal to or greater than the amount they would be able to collect from your assets and income, known as the Reasonable Collection Potential (RCP).

Types of Offer in Compromise

There are three types of OICs, each based on different circumstances:

• Doubt as to Collectibility – This is the most common type and is used when the taxpayer can demonstrate that the tax debt is likely uncollectible in full by the IRS through normal collection means.
• Doubt as to Liability – This type is less common and is applicable when there is a genuine dispute about the existence or amount of the correct tax debt under the law.
• Effective Tax Administration – This is for taxpayers who may be able to pay the full amount but doing so would create an economic hardship or would be unfair and inequitable due to exceptional circumstances.

The Offer in Compromise Process

The process of submitting an OIC is detailed and requires careful attention to ensure the best chance of acceptance. Here's an overview of the steps involved:

• Investigation – Before submitting an offer, it's crucial to understand the full scope of your tax liability. This may involve a thorough review of your financial situation and tax history.
• Completing the Application – You'll need to complete Form 656, Offer in Compromise, and Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals, or Form 433-B (OIC), Collection Information Statement for Businesses.
• Payment of Application Fee and Initial Payment – As of the knowledge cutoff in 2023, a non-refundable application fee of $205 must be submitted with your OIC (waived for low-income taxpayers). Additionally, you must choose a payment option and submit an initial payment along with your application.
• IRS Review – The IRS will review your application to determine if it meets the criteria for an OIC. This process can take several months.
• Acceptance or Rejection – If your offer is accepted, you'll need to adhere to the terms of the agreement, including staying compliant with all filing and payment requirements. If rejected, you can appeal the decision.

Success Stories and Statistics

While the OIC program is not a one-size-fits-all solution, many taxpayers have successfully negotiated their tax debts down to a manageable amount. For instance, in 2020, the IRS accepted over 17,000 offers with an average settlement amount of roughly $10,000, a significant reduction from the average assessed tax debt of those offers.

Case studies show that taxpayers from various backgrounds and owing various amounts have been able to utilize the OIC program to reduce their tax burdens. From small business owners overwhelmed by payroll tax debts to individuals facing financial ruin due to unforeseen circumstances, the OIC has been a pivotal tool in their financial recovery.

Conclusion: A New Beginning with Offer in Compromise

The Offer in Compromise program can be a beacon of hope for those drowning in tax debt. It's a complex process that requires a thorough understanding of IRS guidelines and a strategic approach to negotiating your offer. While not everyone will qualify, for those who do, an OIC can provide a much-needed fresh start and the opportunity to regain financial stability.

If you're considering an OIC, it's often beneficial to consult with a tax professional who can help you navigate the process and increase your chances of success. Remember, an OIC is not just about settling your tax debts for less—it's about setting you on a path to a more secure financial future.

In summary, the Offer in Compromise program is a valuable tool for those facing insurmountable tax debts. By understanding the eligibility criteria, types of OICs, and the process involved, you can make an informed decision about whether this program is right for you. With the right approach and professional guidance, an OIC could be the lifeline you need to overcome your tax challenges and move forward with confidence.