What is an offer in compromise (OIC)?
If you owe taxes to the IRS and are unable to pay the full amount, the IRS may accept a lesser amount and forgive or “write off” the rest. This type of settlement is called an offer in compromise (OIC).
An OIC is a settlement agreement between you (the taxpayer) and the IRS. Under this type of agreement, the taxpayer and the IRS accept a lump sum payment or installments of an amount that is lower than the entire amount owed. It takes several months to process an OIC request so be sure to allow yourself enough time if you want to apply for an OIC. There are certain guidelines to qualify for OIC and how the OIC will be applied depending on your circumstances. If you are the middle of a bankruptcy filing, for example, you cannot apply for an OIC.
Compliance with Payment Requirements
For tax years before 2006, you must be in full compliance will all filing and payment requirements before completing an application for OIC. This means that you must have had filed your returns on time and if any taxes were owed in the past, payments were made on time.
The law changed in 2005 and for any OIC applications after 2006, failure to file a previous tax return will not disqualify you from applying for an OIC. Most people will fall into this category, so if you owe taxes for any year after 2006, you can still apply for an OIC even if you failed to file a tax return for some other year sometime in the past. Understand that if you fail to meet at any terms of the OIC you receive, the IRS can reinstate the entire amount that you originally owed.
Once you receive an approved OIC from the IRS, you must not violate any tax filing or payment requirements for a period of 5 years. Otherwise, the IRS will revoke the terms of the OIC. Not everyone will qualify for the OIC, but if you can, it is worthwhile and can give you a fresh start.
Qualifying for an OIC
The IRS approves an OIC request on a case-by-case basis. Based on your individual situation, the IRS will first decide if you qualify for an OIC and then what type of OIC (lump sum payment or installments). The IRS looks at the following four factors to determine if you qualify:
- Ability to pay;
- Monthly expenses;
How to Apply
Step by step instructions and application forms are available on the IRS website (Offer in Compromise Booklet, Form 656-B). Individual taxpayers must file Form 433-A and businesses must file form 433-B. There is a non-refundable $186 application fee (this fee is credited towards the amount due). Most importantly, you must submit an initial payment with your application. This is mandatory and without this payment your application will not be processed.
When you submit your application for OIC, you have to make an initial payment. This means that you have to send in some money (in addition to the non-refundable application fee) that will go toward the payment of the tax liability. The IRS requires an initial payment because it shows that you are serious about making payments. There are two payment options for the initial payment:
- When submitting your application, send in 20% of the total offer amount with your application. For example, assume you owe $1000 but you would like to settle for $500. That means you have to send in $100 along with your application. If you select this option, no further payments are required until your OIC request is approved. If your application is approved and you selected this initial payment option, the rest of the balance must be paid in 5 or fewer monthly payments.
- Submit the monthly payment that you would like the IRS to accept. Continue to make these monthly payments while the IRS is processing your application. If your application is approved, complete making the monthly payments until the balance is paid in full.
What Happens after I File My OIC Application?
The IRS has 24 months to make a decision on your application. If the IRS fails to send you a decision regarding the status of your OIC application after 24 months, your application will be considered approved. Any attempts at collection of your outstanding tax liability will be suspended until a decision on your OIC application is reached. Any money you send in during this time will be credited to your balance. However, a federal tax lien may be filed even though an OIC application is pending.
Low Income Individuals
If you can meet the low-income guidelines, you do not have to pay the application fee, initial payment, or monthly payments while your OIC application is being processed by the IRS. The IRS considers someone low-income if their income is 250% of the federal poverty level. For example, in 2016 the federal poverty level was $11,880 for a single person. Based on that number, that means that only those single taxpayers making less than $29,700 will be considered low-income. If you file an application as a low-income taxpayer and the IRS later determines that you are not low-income, the OIC application will be returned to you, so be sure that you qualify before applying.
If you would like to discuss the amount you owe or have questions regarding the application process, you can call 1-800-829-1040.