Understanding your options when dealing with the IRS is crucial to managing your tax obligations. One such option is an Offer in Compromise (OIC), a program that allows you to settle your tax debt for less than the full amount you owe.
This guide will walk you through applying for an OIC, including eligibility requirements and the application process.
Step 1: Understand What an Offer in Compromise Is
An Offer in Compromise agreement between a taxpayer and the IRS resolves the taxpayer’s tax debt by accepting less than full payment. The IRS provides an option to help taxpayers who cannot pay their tax debt in full or if doing so creates a financial hardship. However, it’s important to note that only some are eligible for an OIC, and the IRS accepts only a fraction of the applications it receives each year.
Step 2: Determine Your Eligibility
Before you can apply for an OIC, you need to determine if you’re eligible. The IRS considers several factors when determining eligibility, including your ability to pay, income, expenses, and asset equity. You must be current with all filing and payment requirements and can’t be in an open bankruptcy proceeding. To help determine your eligibility, you can use the IRS’s Offer in Compromise Pre-Qualifier tool.
Step 3: Gather Your Information
If you’re eligible for an OIC, the next step is to gather all the necessary information. This data normally includes your income, expenses, assets, and liabilities. You’ll need to provide this information on Form 433-A (OIC) for individuals or Form 433-B (OIC) for businesses. You’ll also need to explain your financial situation and why you believe an OIC is appropriate.
Step 4: Submit Your Offer
Once you have all your information, you can submit your offer. You’ll need to complete Form 656, Offer in Compromise. This form requires you to specify the amount you’re offering to pay and how you plan to pay it (lump sum or periodic payments). You’ll also need to submit a $205 application fee and an initial payment, which are non-refundable. You can waive the fee and initial payment if you meet the Low Income Certification guidelines.
Step 5: Wait for the IRS Response
After you submit your offer, the IRS will review your application. This process can take several months. During this time, the IRS may request additional information. It’s important to respond promptly to any requests to ensure timely responses.
The IRS may accept your offer, reject it, or propose a counteroffer. If your offer is accepted, you must meet all the agreement terms, including making all required payments and staying compliant with all tax obligations for the next five years. If the IRS rejects your offer, you can appeal the decision within 30 days.
Step 6: Understand the Consequences
An OIC can be a great option for resolving your tax debt, but it’s not without consequences. An accepted OIC will be reported on your tax transcript and could affect your credit score. Additionally, the IRS will apply any future tax refunds to your tax debt until paid in full.
Step 7: Seek Professional Help
Applying for an OIC can be complex, and seeking help from a tax professional is often beneficial. A tax professional can help you understand your options, determine your eligibility, and guide you through the application process.
Conclusion
An Offer in Compromise can be a lifeline for taxpayers struggling with significant tax debt. However, it’s not a quick fix or an easy way out. It requires a thorough understanding of the process, careful preparation, and strict adherence to the terms of the agreement.
Following the steps outlined in this guide can help you confidently navigate the OIC process and take a significant step toward resolving your tax debt.
Remember, you’re not alone if you’re struggling with tax debt. The professionals at 800Tax are here to help. Call us today for a free consultation to discuss your situation and explore your options.