IRS Offer in Compromise: What to Know

Some 14 million Americans owe a whopping $131 billion of federal tax liability in back taxes, penalties, and interest from 2018. It's not surprising to know that not only does the IRS keep track of these things, but they will also do what they can to get the money. 

The IRS has an IRS’ collection statute which gives them a ten-year window to collect back taxes from individuals. 

Are you one of the millions who still owe back taxes and have no tax payment options?

Are you hoping to find a way to negotiate the amount you actually owe to the IRS?

If you're nearing the end of the window the IRS can collect, you might have heard of an Offer in Compromise. 

If you have tax problems and are hoping for an Offer in Compromise, you may have some questions. Read on to learn from these Offer in Compromise FAQs.

What Is an Offer In Compromise?

The Offer in Compromise program run by the IRS is one where the IRS agrees to take a settlement offer because it's the most it can expect to get out of the IRS debt owed. 

If it becomes obvious after careful evaluation of a number of factors that the person owing the taxes will not be able to pay in full, then the IRS may consider the option of an Offer in Compromise. 

The only way the IRS will consider an Offer in Compromise is when typically there is no way for the IRS debt to get paid in full or it creates such a financial hardship that they are willing to negotiate.

An Offer in Compromise should not be a fallback position if you owe taxes. They can be challenging to get approved and the IRS will only do so when they are certain they can't get more money out of you before the collection statute expires.

How Can a Taxpayer Become Eligible for an Offer In Compromise?

The IRS will not even consider an OIC application for an Offer in Compromise unless you have done certain things.

Don't assume you can do a quick offer letter to delay the process and try to get the IRS off your trail

They won't even consider an Offer in Compromise offer letter from you if a few things are not in place.

These include:

• Filed all required tax returns
• Made any required estimated payments

You're also required to send in an oic application fee when you apply. That fee will get returned to you. The initial payment you would be expected to make with your offer letter will not get returned though because it is one of the non-refundable payments.

This fee does not apply to someone who is considered a low income taxpayer who makes a liabilty offer.

The IRS will take that and apply it towards your balance. 

The other important thing to know is that if you in the process of filing for bankruptcy, you cannot apply for an Offer in Compromise from the IRS. They won't accept your application in the middle of a bankruptcy proceeding.

What Is the Application Process for an Offer In Compromise?

The IRS has a set process and forms for applying for an OIC. You will want to seek out Form 656-B and the Offer in Compromise Booklet. There are several forms required as part of your application. Those forms include:

• Form 433-A (OIC) (individuals) or 433-B (OIC) (businesses) and the required documentation
• Form 656(s) - individual and business tax debt (Corporation/ LLC/ Partnership) must get submitted on separate Form 656
• $205 application non-refundable fee 
• Initial non-refundable payment for each Form 656

Remember too that you must be up to date on all tax filings and have any required payments you've arranged made and up to date too. 

What Payment Options Does a Person Behind on Taxes Have?

Again, don't be under the impression you can use the OIC application for an OIC as a stall tactic. The IRS will expect you to send in some money as part of your OIC application which is 20 percent of the offer amount.

Then you will also have to designate as part of your offer letter how you intend to pay off whatever you're offering. Typically, the IRS will accept one of two options. 

The lump-sum cash payment option expects you to send in at 20% of what you owe with the offer letter. If your offer gets accepted, then you will be expected to pay off the IRS in five or fewer installment payments.

The periodic payment plan allows you to send in the offer letter. Then you would be expected to continue making the monthly payments while the offer letter's considered. If your letter gets accepted, then you'll continue on with those monthly payments until your balance is paid off. 

Remember, missing any payment or tax deadline can void your Offer in Compromise.

What Can The IRS Still Do While You Work Through The Offer In Compromise Process?

The Offer in Compromise process is not a fast one. You should be prepared for this take time to hear a response from the IRS once you submit your offer letter. During the time you're waiting for a response several things can and will happen, both from your end and from the IRS side. 

The payments and fees you sent in with your offer letter will be applied to the tax liability you have. You can ask the IRS to apply payments to certain years and certain debts.

The IRS is likely to file a Notice of a Federal Tax Lien. However, the IRS will suspend their other collection activities. They will also extend the legal assessment and collection period.

As was already explained, the IRS will expect you to continue making the payments you proposed while you await their response. If you had a previous existing installment agreement, you're no longer required to make those payments.

The good news is that your offer will be considered automatically accepted if you don't get a response from the IRS with two years. The bad news is that they can actually take that long to respond.

Offer In Compromise, Accepted or Rejected

When you apply, one thing you'll submit is Form 656. There is a list of offer terms listed in Section 7. You will be expected to meet all of those terms if your offer is accepted. Remember, the IRS will expect you to file all required tax returns and make all scheduled payments. 

If you become eligible for a tax refund in the year when your offer letter gets accepted, don't get too excited. The IRS will automatically apply the refund to your tax debt. 

It's very likely through the process of having back taxes for many years that the IRS has placed tax liens on your property. These tax liens are not removed when your offer letter's accepted. They won't be removed until you satisfy the terms of the agreement.

You also want to be aware that parts of your offer information are part of public records and be available for public review. Someone would simply need to request a copy of the public inspection file to review it.

What happens if your offer letter gets rejected? Don't despair, rejections can happen for a number of reasons. You have 30 days to file an appeal to the IRS. You would use the Request for Appeal of Offer in Compromise, Form 13711 PDF.

The IRS has an Independent Office of Appeals and they can provide guidance on the appeal process for your rejected offer.

Why Is It So Difficult to Get an Offer In Compromise?

It's no secret that getting the IRS to accept an Offer in Compromise letter is not easy. Are you wondering why the IRS makes it so difficult to get an OIC approved. One of the biggest problems is that many people are simply not eligible. 

The IRS wants to get as much money out of you as possible. If they think you have equity from your assets or the anticipated future income to cover your whole debt, they won't be accepting your offer.

The other problem for many taxpayers is that they simply can't come up with enough money to cover all of the costs that come with an OIC.

Don't get fooled by the idea that you can negotiate an amount and haggle with them over what you actually pay. The truth is that the IRS is going to expect you to pay what they think they can reasonably get out of based on your assets and income before the statute runs out. They are not likely to settle for an amount less than that.

Answering Your Offer In Compromise FAQs

Getting your Offer in Compromise letter approved is quite a process. It can get you on the road to recovery with your tax problems. Use these Offer in Compromise FAQs to help you decide if an OIC is the best option for you. 

Facing your tax problems can feel overwhelming and scary. It might be smart for you to seek the guidance of an experienced tax expert. Let Keith L. Jones help you figure out how to handle your tax issues. Book an appointment today to discuss your options.