Navigating tax debt can be a stressful and confusing experience. If you find yourself in this situation, understanding your options and exploring potential solutions is crucial. One option you may consider is a lump sum settlement with the IRS, also known as an Offer in Compromise (OIC). This article delves into the intricacies of OICs, providing you with the information you need to determine if this approach aligns with your specific circumstances.
What is an Offer in Compromise (OIC)?
An OIC is an agreement between you and the IRS that settles your tax liabilities for a lower amount than what you originally owed. This option can be particularly beneficial if you’re facing financial hardship or if the full amount of your debt seems unmanageable. However, it’s important to understand that the IRS won’t automatically approve every OIC request. They will carefully evaluate your financial situation and ability to pay before making a decision.
Eligibility Requirements for an OIC
To be eligible for an OIC, you must meet certain criteria:
- Filed all required tax returns: Ensure you’ve filed all your tax returns, including any amended returns, before submitting an OIC application.
- Made all required estimated tax payments: If you’re self-employed or receive income from sources other than your employer, you’re responsible for making estimated tax payments throughout the year. Make sure you’ve fulfilled this obligation before applying for an OIC.
- Received a bill for at least one tax debt included in the offer: The IRS won’t consider an OIC unless you’ve received a bill for the specific tax debt you’re hoping to settle.
- Made all required federal tax deposits for the current quarter and the two preceding quarters (if you’re a business owner with employees): Business owners with employees are required to make regular federal tax deposits. Ensure you’ve met this obligation before applying for an OIC.
Factors Considered by the IRS When Evaluating an OIC
The IRS will assess your eligibility for an OIC based on several factors:
- Doubt as to liability: The IRS may consider an OIC if there’s a genuine dispute regarding the existence or amount of the tax debt. This could involve situations where the tax law is unclear or where there are factual errors in the IRS’s calculations.
- Doubt as to collectibility: If your assets and income are insufficient to cover the full amount of your tax debt, the IRS may consider an OIC based on doubt as to collectibility.
- Effective tax administration: In some cases, the IRS may accept an OIC based on effective tax administration. This could occur when collecting the full amount of the debt would create an undue economic hardship or would be unfair due to exceptional circumstances.
Application Process and Required Forms
If you believe you qualify for an OIC, you’ll need to submit the following forms:
- Form 656, Offer in Compromise: This form provides the IRS with detailed information about your financial situation and the offer you’re proposing.
- Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals: This form outlines your income, expenses, and assets, allowing the IRS to assess your ability to pay.
- Form 433-B (OIC), Collection Information Statement for Businesses: If you’re a business owner, you’ll need to submit this form instead of Form 433-A (OIC).
Application Fee and Payment Options
Submitting an OIC application typically requires a non-refundable application fee. However, there are exceptions:
- Doubt as to liability: If your OIC is based on doubt as to liability, you won’t need to pay an application fee.
- Low-income exception: Individuals who meet certain income requirements may qualify for an exemption from the application fee.
Regarding payment options, you have two choices:
- Lump sum cash offer: This option involves paying the agreed-upon amount in a single payment or within a few installments over a short period. If you choose this option, you’ll need to submit an initial payment of 20% of the offer amount along with your application.
- Periodic payment offer: This option allows you to make monthly installments over a longer period, typically within 24 months of the offer’s acceptance. You’ll need to submit the first proposed installment payment along with your application.
Suspension of Collection Activities
While the IRS is evaluating your OIC application, collection activities will generally be suspended. This suspension remains in effect for a specific period after the IRS’s decision, even if the offer is rejected.
Offer Terms and Conditions
If the IRS accepts your OIC, you’ll be required to comply with certain terms and conditions, including:
- Filing all required tax returns and making all tax payments on time for five years from the date of acceptance.
- Abiding by all other terms and conditions outlined in the OIC agreement.
Failure to comply with these terms could result in the IRS terminating the OIC and resuming collection activities for the original amount owed, plus interest and penalties.
Right to Appeal a Rejected Offer
If your OIC is rejected, you have the right to appeal the decision to the IRS Independent Office of Appeals within 30 days of receiving the rejection notice. The Appeals office will review your case and make a final decision.
Additional Information and Resources
For more detailed information about OICs, you can refer to the following resources:
- Offer in Compromise Booklet, Form 656-B: This booklet provides step-by-step instructions and all the necessary forms for submitting an OIC.
- Offer in Compromise Pre-Qualifier tool: This online tool helps you confirm your eligibility for an OIC and prepare a preliminary proposal.
- Publication 594, The IRS Collection Process: This publication provides an overview of the IRS’s collection process, including information about OICs.
- Offer in Compromise: This IRS webpage provides additional information about the OIC program.
Exploring an OIC with the IRS can be a viable option for resolving your tax debt, especially if you’re facing financial hardship or if the full amount of your debt seems unmanageable. However, it’s crucial to understand the eligibility requirements, application process, and potential consequences before proceeding. Carefully review the provided resources and seek professional advice if necessary to determine if an OIC is the right solution for your specific circumstances.
What are required federal tax deposits?
Employers report employment taxes either semi-weekly or monthly via a federal tax deposit. For the business owner and every employee in the company, the taxes that need to be reported are federal income tax, Social Security tax, and Medicare tax. This includes all wages, tips, and other types of compensation.
For the majority of wage workers, a portion of their earnings is deducted each time they get paid in order to go toward their annual estimated tax. Wage earners will use Form W-4 when filing their tax returns during tax season. In order to change how much they owe or are reimbursed when they file their tax returns, wage employees can change the amount of income that is withheld from each paycheck. They will get a tax refund if their estimated tax payments were overpaid. When they file their tax returns, they will owe money to the IRS if they did not pay enough.
What happens while the IRS considers an offer in compromise?
It is helpful to comprehend how the IRS assesses your offer if you have filed or are in the process of filing an application for an offer in compromise.
- Your entire non-refundable payment and fee balance will be applied to your outstanding tax obligation.
- It might be possible for you to choose which tax year or tax obligations these non-refundable payments are applied to.
- To establish a legal claim over your assets and obtain payment for unpaid taxes, the IRS may send you a notice of a federal tax lien.
- While assessing your offer, the IRS will put a halt to further collection efforts.
- Your offer will be evaluated while your legal assessment and collection period are prolonged.
- You must pay all of the estimated taxes that are specified in your offer.
- While your offer is being considered, you will not be required to make payments on any other existing installment agreements if you are applying for an offer in compromise.
- Your offer will be automatically accepted by the IRS if it does not respond to your offer in compromise within two years of the IRS receipt date. However, this two-year period does not include an appeal period.
The Internal Revenue Service’s offer in compromise program might be the most advantageous way of tax debt relief for the majority of people who are having trouble paying their taxes. If you meet the requirements for an offer in compromise, the IRS might agree to a tax settlement that is lower than what you owe. In this scenario, you could agree to pay the settlement’s more manageable amount rather than the full amount that was originally shown on your tax bill.
This tax obligation relief program is also known as the government tax negotiation program because it allows individual taxpayers and business owners who are having trouble paying their back taxes to agree on a tax payment that will allow them to continue paying for their permitted living expenses.
IRS Installment Agreement Don’t Do This!
FAQ
Will IRS take a settlement amount?
How likely is the IRS to accept an offer in compromise?
Is it possible to negotiate with the IRS?
What is the IRS 6 year rule?
Do you owe the IRS a lump sum?
Helpful as it is for the IRS to offer more options for struggling taxpayers, you have to do your bit, too. First of all: If, come the tax filing deadline, you owe the IRS an amount that you cannot pay in one lump sum, it is important to file the return anyway, says Lawrence Brown, an attorney in the office of Brown P.C. in Fort Worth, Texas.
How much do you have to pay for a lump sum offer?
Lump Sum Offer: Generally, you’ll be required to pay 20 percent of the total amount you’re offering when you submit the offer. You’ll need to pay the rest in five or fewer payments, within five or fewer months of the date the IRS accepts the offer.
How do I make a lump sum payment?
Lump Sum Cash: Submit an initial payment of 20% of the total offer amount with your application. If we accept your offer, you’ll receive written confirmation. You must pay any remaining balance due on the offer in five or fewer payments. Periodic Payment: Submit your initial payment with your application.
Can an IRS offer in compromise help you settle tax debt?
IRS offers in compromise can help you settle tax debt for less than you owe, but they’re difficult to qualify for. The application process can take quite a long time, but these offers can be a huge help if you’re struggling to get out from under a debt load. An IRS offer in compromise enables you to settle tax debt for less than you owe.