An Offer in Compromise (OIC) is a helpful tax relief strategy since, if successful, it clears your outstanding tax debt completely. Most other tax relief options have an outstanding amount that may continue to accrue penalties and interest. However, before the IRS accepts your OIC application, you must go through various steps that include submitting extensive documentation to support your claim.
The IRS determines whether or not your application will be accepted, but you can improve your chances by submitting a compelling application. In this article, learn how Offer in Compromise works as a tax relief solution and how our tax professionals can help you make your application.
What Are Offers in Compromise?
An Offer in Compromise (OIC) is an effective method to eliminate your tax debt. It is a federal program where the taxpayer settles the outstanding debt for cents to every dollar owed. Low-income families can pay their debt for considerably less than they owe.
OIC is open to all income levels and ages, but the IRS does not accept all applications. Their acceptance rate changes from year to year, but it has accepted 25-45% of applications in the last few years.
Eligibility for Offers in Compromise
Several strict pre-qualifiers make a taxpayer eligible for tax settlement through OIC. First, the IRS looks at your reason for requesting OIC tax settlement, and they only consider applications where:
- It is not certain that the IRS correctly assessed your outstanding taxes
- It is not certain that the IRS will be able to recover the full amount, e.g. if you owe more than your assets and income
- Paying off your tax debt in full will cause the taxpayer undue economic hardship – called effective tax administration
For reasons 2 and 3 above, the IRS also considers the following:
- Whether you can pay and how much you may be able to pay
- Your current income
- Your current assets
- Your current expenses
The IRS will generally accept OIC that meets the maximum amount you can pay within a reasonable period. You are ineligible for OIC settlement, however, if:
- You have ongoing bankruptcy proceedings
- You have not been paying your required installments/payments
- You have not filed your federal tax returns
- If self-employed with employees, you have not submitted the requisite federal tax deposits
Generally, the IRS only accepts offers in compromise greater than or equal to a tax liability’s collection potential.
How to Submit an Offer in Compromise
The smallest offer the IRS accepts as OIC depends on your financial ability. Businesses use form 433-B to reveal their financial state, while self-employed or employed wage-earners should use Form 433-A. You should reveal the following:
- Income and expenses
- If you declared bankruptcy
- Whether you own a safe deposit box and its contents
- If you have benefited from an estate, trust, or life insurance policy and its details
- Any bank account balances, investments, available credit, and cash life insurance policies
- Any tangible and intangible assets
College or private school expenses and charitable and voluntary retirement contributions are not allowable expenses. Once you have these details, it’s important to get a tax professional to help you assess the minimum offer value.
Apart from the offer, you must submit several forms, including collection information statements, the application fee, and proof of payment of the first instalment of your offer. If you wish to pay a lump sum, the first payment should be at least 20 percent of the total offer. If the IRS accepts your OIC, you must pay the remaining amount in no more than five payments.
Get Help with Your Offer in Compromise at Finishline Tax Solutions
You can use the IRS OIC pre-qualifier tool to check whether you are eligible for OIC. However, note that eligibility does not translate to acceptance. For example, if you can pay your outstanding taxes through an instalment agreement, you don’t qualify for an OIC tax settlement.
There are many steps to filing an OIC application and even appealing upon rejection. Our Finishline Tax professionals can help you with these steps to maximize your chances of a favorable outcome.
Contact us today to get started.