According to the Federal Reserve, roughly 30% of Americans would be unable to come up with the cash to cover an unexpected $400 cost. This lack of savings can be almost catastrophic if they complete their tax returns, only to realize that they owe a sizable tax debt to the Internal Revenue Service (IRS).
However, the keyword here is "almost." The IRS is willing to work with taxpayers who come up short at tax time. Making an offer in compromise (OIC) is one of a few options taxpayers have to work things out with the IRS. This program lets you settle your tax debt for less than what you owe.
Here's what you should know about this program.
- Offers in compromise allow taxpayers to settle their tax debt for less than owed.
- Taxpayers propose the amount of the offer and choose a repayment plan. The IRS accepts or rejects the offer.
- The IRS will accept the offer if the taxpayer can demonstrate that there is doubt to tax liability, or doubt to the debt's collectibility, or issues about the fairness of the assessment.
What Is an Offer in Compromise?
Offers in compromise allow taxpayers to settle their tax debt for less than the full amount owed. This program is available for those who need it, which means the IRS will assess your income, expenses, assets equity, and overall ability to pay your debt as it considers your offer in compromise.
- Acronym: OIC
There are two payment options for an offer in compromise: a lump-sum payment plan, and a periodic payment plan. Applicants must submit a 20% down payment if they choose a lump-sum payment plan, and then they settle the remaining balance of their OIC in no more than five subsequent payments. Applicants who use a periodic payment plan must make monthly payment plans.
The IRS offers an interactive pre-qualifier tool to help taxpayers learn whether they may qualify for an OIC settlement.
How to Qualify for an Offer in Compromise
There's no guarantee that the IRS will accept your offer in compromise. The IRS bases its decision on several factors. After weighing the factors of your financial situation, the IRS may accept an OIC for one of three reasons.
You will not be approved if you qualify for a payment installment agreement or some other program designed to help taxpayers settle debts. If you qualify for one of these programs, the IRS figures that you have ample resources to pay off your tax debt in full over time.
Doubt As to Liability
The IRS might approve your offer if there's some question as to whether you legitimately owe the tax debt or not. For example, if you believe there was an error on your tax return, you could use an OIC to address that error. However, keep in mind that you can also amend a tax return, and this may be a more simple way to resolve issues along these lines.
Doubt As to Collectibility
The IRS might also approve your application if—based on your submitted paperwork that documents your current financial situation—it appears highly unlikely that you'll ever be able to pay off the tax debt in its entirety. In this case, when you tally up your income and the value of your assets, it could come out to less than what you owe.
Issues With Effective Tax Administration
Finally, you might be approved if "payment in full would either create an economic hardship or would be unfair and inequitable because of exceptional circumstances." If you qualify for this reason, it trumps other issues like collectibility or doubt of liability—even if you know you owe the debt and have the assets needed to pay it off, you can still potentially qualify for this reason.
Get the Instructions and Forms
You can obtain all the offers in compromise forms and instructions in a booklet on the IRS website. It's called Form 656-B. You can also call the IRS at 1-800-829-3676 and ask them to mail you the booklet, or you can pick it up from your local IRS taxpayer assistance center.
Alternatives to an Offer in Compromise
The IRS offers at least four other options for digging your way out from under tax debt.
One alternate option is to enter into an installment agreement, a monthly payment plan for paying off the IRS. A short-term installment plan gives you an additional 120 days to come up with the money if you think you can erase your debt in that period. Otherwise, if it will take you longer, you can ask to enter into a long-term plan. Certain restrictions apply, and there may be application fees depending on your situation.
If the IRS determines that it is not currently able to collect your debt, it may voluntarily agree not to collect on the tax debt—temporarily. The debt won't go away through this program, it just gives you some time to get back on your financial feet.
The partial payment installment agreement program offers a long-term payment plan to pay off the IRS at a reduced dollar amount.
You can also file for bankruptcy, but very strict rules apply as to which tax debts are dischargeable and which cannot be erased in Chapter 7 or Chapter 13 bankruptcy proceeding.
Frequently Asked Questions (FAQs)
How to get an offer in compromise?
To get an offer in compromise from the IRS, you will need to fill out Form 656-B, which is available from the IRS' website. To qualify, you will have to demonstrate that the tax liability is in error, or that the debt is not collectible, either due to your financial situation or exceptional circumstances.
How long does an offer in compromise take?
Estimates from tax experts vary: The process can take from six to 14 months or longer, during which time you must make payments as offered and file timely tax returns. However, if the IRS does not respond to the offer with a rejection within 24 months, then the offer is considered accepted.