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Offer in Compromise

Offer in Compromise is an agreement between a taxpayer and the Internal Revenue Service. Commonly referred to as an OIC, it settles a taxpayer’s tax liabilities for less than the full amount owed. In most cases, taxpayers who can fully pay their tax liabilities through an installment agreement or other means, won’t qualify for an OIC. The IRS approves an OIC application when the amount being offered by a taxpayer is the most the IRS can expect to collect within a certain window of time. While an OIC may seem like a logical option for struggling taxpayers, it is important to weigh the costs and risks associated with the application processes before making a decision. Here are three scenarios under which the IRS accepts Offer in Compromise requests:

  • Doubt as to Liability: The taxpayer believes the amount of tax assessed is incorrect and wants to dispute either part or all of the amount owed.
  • Doubt as to Collectibility: Considered to be the most common scenario, the person filing under this category must demonstrate that he or she will likely never be able to pay the full tax obligation due to financial hardship or some other compelling reason. The IRS will consider the following set of facts and circumstances when reviewing an application: 
    • The taxpayer’s specific circumstances and financial situation;
    • The taxpayer’s ability to pay;
    • The taxpayer’s annual income;
    • The taxpayer’s other expenses; and
    • The taxpayer’s assets and equity in those assets.
  • Effective Tax Administration (ETA): Requests for assistance under this scenario do not dispute the amount of tax owed, and applicants cannot qualify for a Doubt as to Collectibility offer either. This means that you own sufficient equity in assets to fully pay you tax liability, but due to special or exceptional circumstances, liquidation of those assets would create an economic hardship. The elderly and disabled taxpayers who are on fixed income often use this scenario.

If you’re interested in discovering whether or not you may qualify for an Offer in Compromise, you can access the Offer in Compromise Pre-Qualifier on the IRS official website today. This allows you to begin planning your proposal now and move forward in this long process.

The Application Process

Taxpayers who are eligible to apply for an Offer in Compromise must fill out the Form 656-B, Offer in Compromise Booklet PDF  or Form 656-L, depending on the reason for the OIC. These documents are available on the IRS’ website. The packet  includes:

  • Form 433-A (OIC) for individuals
  • Form 433-B (OIC) for businesses, as well as a list of the required documentation.
  • Form 656(s) for individual and business (Corporation/ LLC/ Partnership) 
    • These must be submitted on separate Form 656
  • A non-refundable application fee of $205
  • A non-refundable initial payment for each Form 656.

In regards to the non-refundable initial payment, taxpayers have two options to choose from**. These include:

  • Lump Sum Cash: 20% of the total offer amount in your application. Once approved, taxpayers will pay the remaining balance within five or fewer payments.
  • Periodic Payment: After submitting a proposed initial payment, taxpayers are responsible for paying the remaining balance in monthly installments while the IRS processes their offer. Once accepted, they continue to pay the remaining balance in monthly installments. This process is usually completed within a 24 month period and/or 6 or more monthly payments.

** If you fall under the Low Income certification guidelines, you are not required to pay application fees, initial payments, or monthly installments while your OIC application is being evaluated.

Once You’ve Applied

As you wait for the IRS to either approve or deny your application, you are still responsible for making payments towards your tax liability. Other things to expect include the following:

  • Non-refundable payments are applied to your due taxes. You still have the option to apply these payments to a specific tax year. 
  • IRS collection activities and seizure of assets will be suspended temporarily.
  • Legal assessment and the collection period for your tax filings will be extended.  
  • You are responsible for making all due payments; however, you are not responsible for making payments on other installment agreements.
  • Your case may become public record and become documented via a Notice of Federal Tax Lien.
  • If the IRS fails to make a determination within 2 years of its receipt date, your offer will be automatically accepted.

Has Your Application Has Been Approved/Denied?

If an OIC application has been accepted, the taxpayer will then be required to file all required tax returns timely and make payments detailed in Section 7 of Form 656. Any refunds received during the calendar year in which an offer was accepted will be applied to their tax liability. 

If an offer is rejected, taxpayers can make an official appeal within 30 days through a Request for Appeal of Offer in Compromise, Form 13711 PDF.

What Coast One Tax Group Can Do For You:

An Offer in Compromise involves significant amounts of paperwork, while the IRS’ processing times can be extremely lengthy. However, the Fresh Start program was instituted in 2011 and can provide taxpayers with additional assistance and a more streamlined process under certain conditions. The ultimate goal with an OIC is to achieve a compromise that suits the best interests of both the taxpayer and the IRS. To be considered, you must first make an appropriate offer based on what the IRS considers to be your true ability to pay.

We understand that Offer in Compromises have a very low acceptance rate, and you may want to consider hiring a professional to help your chances of success if you feel that you may qualify. The team at Coast One is proud to have a 2018 track record of saving clients 92% or more on their back taxes when negotiating an Offer in Compromise.  Give us a call today for a free consultation to see if you qualify. We promise to work with you to create the strongest case possible, and to also defend your case to the IRS. Our team understands how tax laws work and can provide expertise and keen attention to detail that you won’t find elsewhere.

 
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