Title: Offer in Compromise (OIC) — What it Is, Who Qualifies, and Practical Steps to Apply
Summary
An Offer in Compromise (OIC) is an IRS program that lets eligible taxpayers settle a tax liability for less than the full amount owed when full payment would create financial hardship or cannot be collected in full. The IRS evaluates each case based on the taxpayer’s ability to pay, income, expenses, and assets (the taxpayer’s “reasonable collection potential” or RCP). OICs are available only to eligible taxpayers and require documentation, application forms, a fee (unless you qualify as low-income), and an initial payment. If accepted, the taxpayer must remain compliant with filing and payment obligations for a period after acceptance.
1) What an Offer in Compromise Is
– Definition: An agreement between a taxpayer and the IRS to settle a tax debt for less than the total owing.
– Purpose: To collect the most the IRS can reasonably expect to collect within a reasonable period, given the taxpayer’s financial circumstances.
– Outcome: If accepted, the agreed amount settles the assessed tax liabilities covered by the offer; penalties and interest generally stop accruing on the settled liability once accepted.
2) Who Is Eligible (Key Requirements)
You may be eligible for an OIC if:
– You have filed all required tax returns.
– You are not in an open bankruptcy proceeding.
– You have paid any required estimated taxes for the current tax year (in some cases).
– You are able to demonstrate that you cannot pay the full tax debt through either a lump-sum payment or an installment agreement without creating hardship.
– You submit a complete application (Form 656) and the required supporting financial disclosure (Form 433-A(OIC) for individuals and Form 433-B(OIC) for businesses).
Note: Eligibility is fact-specific; the IRS uses your assets, income, and allowable expenses to calculate your RCP. Low-income taxpayers may have fees waived. Confirm current rules on the IRS website or with a tax professional.
3) How the IRS Evaluates an Offer
– Reasonable Collection Potential (RCP): The IRS calculates RCP = collectible equity in assets + future income available to pay. Equity is based on fair market value minus liens and allowed selling costs; future income is based on disposable income after allowed living expenses.
– Payment Options: The offer amount and how it will be paid (lump-sum vs periodic payments) affect IRS consideration.
– Compliance Condition: You must stay current with filing and payment requirements while the offer is pending and for a period after acceptance (usually 5 years).
4) Forms and Fees You’ll Need
– Form 656, Offer in Compromise (primary application).
– Form 433-A (OIC) for individuals, Form 433-B (OIC) for businesses (financial disclosure).
– Filing fee (check current IRS amount); fee may be waived for low-income taxpayers.
– Initial payment: Depends on your chosen payment option (see below).
– Supporting documents: tax returns, bank statements, pay stubs, asset documentation, proof of expenses, business financials, etc.
5) Payment Options with an OIC
– Lump-Sum Cash Offer: Submit 20% of the offer amount with the application; if accepted, the remainder is generally paid in up to five payments.
– Periodic Payment Offer: Submit the first proposed installment with the application and continue making payments while IRS evaluates the offer. If accepted, remaining payments are made per agreed schedule. If rejected the IRS may cash checks while the offer is considered—read instructions carefully.
6) Practical, Step-by-Step Application Process
Step 1 — Gather documentation
– Filed tax returns (all required returns).
– Most recent tax transcripts.
– Bank statements (3–6 months).
– Pay stubs and proof of other income.
– Documentation of assets (home equity, vehicles, investments).
– Monthly expense statements (mortgage/rent, utilities, insurance, medical, transportation, child care, etc.).
– Business financial records (if applicable).
Step 2 — Use the OIC Pre-Qualifier
– Use the IRS Offer in Compromise Pre-Qualifier online tool to get an initial sense of eligibility by entering income, assets, expenses, household size, and debt.
Step 3 — Decide payment option and calculate a reasonable offer
– Consider whether you can make a lump-sum or need periodic payments.
– Estimate your RCP (assets + available future income). Many applicants offer an amount near or slightly below RCP; consult a tax professional if unsure.
Step 4 — Complete forms and prepare supporting documentation
– Fill out Form 656 and the appropriate Form 433 series (433-A(OIC) or 433-B(OIC)).
– Prepare and assemble supporting documents listed above.
– Determine whether you qualify for a fee waiver (low-income).
Step 5 — Submit the application with fee and initial payment
– Mail the completed application packet to the address on Form 656 instructions or follow the IRS submission process.
– Include the application fee (unless exempt) and the required initial payment (20% for lump-sum; first periodic payment for periodic offers).
Step 6 — Make required payments and remain compliant while offer is pending
– Continue filing all required returns and pay any current taxes due.
– Make periodic payments if you chose that option.
– Respond promptly to any IRS requests for additional information.
Step 7 — IRS review, acceptance, rejection, or counteroffer
– The IRS may accept, reject, or make a counteroffer. Processing time varies with complexity—expect several months; some cases take longer.
– If rejected, you can request administrative appeal (instructions and deadlines are provided in the rejection letter).
7) If Your Offer Is Accepted
– You must make the payments exactly as agreed.
– You must file all required tax returns and pay any taxes due for five years following acceptance (the compliance period) or the offer might default.
– Lien treatment: Acceptance may lead to release or subordination of federal tax liens in some cases; results vary with the case.
8) If Your Offer Is Rejected
– You can appeal the decision through the IRS appeals process. Your rejection letter will explain appeal rights and deadlines.
– Alternatives (below) may be more appropriate.
9) Alternatives to an Offer in Compromise
– Installment Agreement: A standard monthly payment plan (apply online with the Online Payment Agreement tool or use Form 9465). Often simpler and faster than an OIC.
– Partial Payment Installment Agreement (PPIA): A longer-term arrangement with reduced monthly payments based on financial hardship; collection continues but at a reduced rate.
– Currently Not Collectible (CNC) status: If you cannot pay anything, the IRS may temporarily suspend collection activity.
– Penalty Abatement: Request removal of penalties for reasonable cause.
– Innocent Spouse Relief: For relief from tax tied to a spouse’s actions (specific rules apply).
– Bankruptcy: In certain cases, some tax debts can be discharged in bankruptcy—consult a bankruptcy attorney.
– Professional representation: Enrolled agents, CPAs, or tax attorneys can represent you and may improve outcome likelihood in complex cases.
10) Practical Tips and Warnings
– File required returns before applying. The IRS typically won’t accept an OIC if returns are missing.
– Stay current with tax filings and payments while the OIC is pending.
– Don’t assume you will be accepted: OICs are granted when the offered amount is the most the IRS can reasonably collect.
– Beware of scams: Use only reputable tax professionals; don’t pay someone a large upfront fee for an OIC “guarantee.”
– Keep detailed records and copies of everything you submit.
– Consider professional help for complex cases (business owners, large assets, or substantial debt).
11) Timeline and Likely Processing Time
– Processing times vary widely based on complexity, completeness of application, and IRS workload. Typical ranges are several months to a year or longer for complicated cases. Expect to keep making payments and stay current during review.
12) Where to Find Official Forms and Tools (sources)
– IRS Offer in Compromise main page and Form 656 booklet (for instructions and requirements)
– IRS Offer in Compromise Pre-Qualifier tool (online eligibility tool)
– Form 433-A (OIC) and Form 433-B (OIC) (financial disclosure)
– IRS Online Payment Agreement tool and Form 9465 for installment agreements
References
– Investopedia: “Offer in Compromise” (NoNo Flores).
– Internal Revenue Service: “Offer in Compromise” and “Offer in Compromise Pre‑Qualifier.”
– Internal Revenue Service: “Form 656 Booklet — Offer in Compromise.”
– Internal Revenue Service: “Apply Online for a Payment Plan.”
– Internal Revenue Service: “About Form 9465, Installment Agreement Request.”
If you’d like, I can:
– Walk through the IRS OIC Pre-Qualifier together (tell me your rough numbers and I’ll explain how they affect eligibility), or
– Provide a checklist and template list of documents to gather for your specific situation, or
– Summarize the differences between an OIC and an installment agreement in a side-by-side table.