Article Highlights:
- About Offers in Compromise
- Application of Up-Front Payments
- Application Fee
- Low-Income Taxpayers
- OIC Concepts
- Doubt as to Liability
- Doubt as to Collectability
- Promotion of Effective Tax Administration
- OIC Qualifications
- Pre-Qualifier Test
- Submission Procedures
- Forms 433-A and 433-B
- Barriers to Offer Processability
- Offers Withdrawn or Determined Non-Processable
- Rejected Offers
- Accepted Offers
- Guidelines for IRS Financial Analysis of a Taxpayer's Offer
Taxpayers can settle their tax bills for less than the entire amount owing through the Internal Revenue Service's (IRS) Offer in Compromise (OIC) program. Financially struggling taxpayers who are unable to pay their tax obligations in full stand to gain the most from this scheme. But if the person can pay the whole amount owed in taxes over time via an installment plan, the IRS won't accept the offer. Over the years, the OIC program has had a number of modifications, most notably as a result of the IRS's previous "Fresh Start" campaign, which increased accessibility and flexibility of the terms. This page explores the numerous facets of the Opportunity for Investment Certificate (OIC) program, such as application costs, upfront payments, lump-sum offers, periodic payment offers, low-income taxpayer offers, and the various ideas and qualifications associated with it.
Application of Up-Front Payments
Taxpayers must make a one-time, non-refundable cost when submitting an OIC. This payment is required while the IRS evaluates the offer's merits. Those who fulfill the requirements for the Low Income Certification, however, are exempt from making the first payment and subsequent installments. The following payment alternatives are listed in accordance with the guidelines in the OIC pamphlet, Form 656-B (April 2024):
- Lump-Sum Offers: In a lump-sum offer, the taxpayer must pay 20% of the total offer amount up front. The rest amount must be paid in five or less payments within five months of the offer being accepted. For taxpayers who can swiftly collect a substantial percentage of the settlement money, this kind of offer is appropriate.
- Periodic Payment Offers: These tax breaks provide taxpayers the opportunity to space out their payments over a longer time frame, often between six and twenty-four months. The offer must be accepted for the first payment, and any further payments must be made in accordance with the suggested parameters. For taxpayers who can handle smaller, more frequent payments but cannot afford a lump sum payment, this is the best alternative.
These up-front payments are considered payments of tax and are not refundable. If the offer is rejected, the up-front payments will be applied to the taxpayer's liability.
Application Fee
There is an application cost of $205 to submit an OIC. There is one exclusion, though:
- Low-Income Taxpayers: The application cost is waived if the applicant is a person or a sole proprietorship and their household gross income is below the low-income threshold. A low-income taxpayer for the most recent year was defined as a person whose Adjusted Gross Income (AGI) did not surpass 250% of the relevant poverty threshold. Form 656's Low-Income Certification chart incorporates this clause.
OIC Concepts
An offer is predicated on one of three concepts:
-
Doubt as to Liability: This idea comes into play when there is a sincere disagreement over the presence or scope of the tax obligation. Taxpayers may file an OIC based on uncertainty as to obligation if they think they don't owe the tax or that the amount is wrong. This objective is served by Form 656-L, which requires the taxpayer to provide a thorough justification for their belief that the obligation is wrong.
- Doubt as to Collectability: This idea comes into play when a taxpayer's income and assets aren't enough to cover their whole tax obligation. Taking into account the taxpayer's income, assets, and permissible living costs, the IRS assesses their reasonable collection potential. The IRS may accept an offer based on uncertainty as to collectability if it finds that the taxpayer is unable to pay the entire amount.
- Encouragement of Efficient Tax Administration: This idea comes into play when it would be unjust and unfair to collect all tax liabilities or when doing so would put the economy in a difficult situation. The IRS may accept an offer if it encourages efficient tax administration, even if the taxpayer is able to pay the entire amount. This category is less prevalent, thus it needs a strong justification to be accepted.
OIC Qualifications
Taxpayers must fulfill several requirements in order to be eligible for an OIC:
- All necessary tax returns need to be submitted.
- It is necessary to make all of the expected tax payments for the current year.
- The taxpayer cannot be involved in an ongoing bankruptcy case.
- The most recent version of Form 656 must be used, and all required supporting paperwork must be submitted.
Pre-Qualifier Test
The Offer in Compromise Pre-Qualifier tool is supported by the IRS and should be utilized by taxpayers. In addition to preparing a preliminary proposal, this tool assists taxpayers in determining their eligibility for an OIC. To determine their odds of being accepted before making an offer, taxpayers should evaluate this helpful resource.
Submission Procedures
Rev. Proc. 2003-71 provides instructions on how to file an OIC. Form 656 must be filed by taxpayers together with Form 433-A (for individuals) or Form 433-B (for companies), and any additional paperwork that is needed. The data supplied has to be up to date and should represent the taxpayer's financial status for the three months prior to the offer submission.
Forms 433-A and 433-B
Important parts of the OIC application are Forms 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, and Form 433-B, Collection Information Statement for Businesses. Comprehensive details on the taxpayer's earnings, outlays, possessions, and debts are needed for these forms. Completeness is required, with non-relevant elements marked as N/A (not applicable).
Barriers to Offer Processability
An OIC may become processable for a number of reasons:
- incomplete applications or without supporting materials.
- not making the application fee payment (unless it is waived).
- not making the requisite upfront payment (unless exempted).
- failing to submit all necessary tax returns.
- failing to make all of the current year's statutory anticipated tax payments.
Offers Withdrawn or Determined Non-Processable
Before an OIC is accepted, taxpayers are free to withdraw it whenever they choose. In-person, mail, fax, or phone requests for withdrawals are all accepted. IRS collection actions might begin after an offer is withdrawn. The IRS will refund the application cost in the event that an offer is deemed ineligible for processing, but any upfront payments will be used toward the remaining tax balance.
Rejected Offers - Until the IRS notifies the OIC in writing of the decision, the OIC is not deemed rejected. The taxpayer is entitled to ask for a meeting to go over potential solutions. The taxpayer has 30 days to register a protest with appeals if no agreement is reached. The individual will get a letter from the IRS explaining why they were rejected. The taxpayer may make another offer and pay a new application charge, but the application money is not reimbursed.
Accepted Offers - The IRS will mail a formal notice to the taxpayer if they accept their offer. To avoid default, the taxpayer must abide by the conditions of the offer and make timely payments. The IRS will discharge all Notices of Federal Tax Lien against the taxpayer upon satisfaction of the payment terms. Accepted bids are made public, and if the offer is for more than $50,000, the IRS Chief Counsel's written opinion is needed.
Guidelines for IRS Financial Analysis of a Taxpayer's Offer
The IRS assesses a taxpayer's capacity to pay by looking at allowed living cost requirements. These guidelines, which are updated on a regular basis, take into account typical costs for essential requirements for residents of comparable geographic locations. In order to calculate necessary costs depending on a taxpayer's income level, the IRS takes into account three standards:
- National Standards: Address apparel, food, and other goods.
- Local Standards: Address transportation, housing, and utilities.
- Taxes, medical treatment, and payments mandated by the court are examples of additional necessary costs.
When a taxpayer is having trouble paying their taxes, the Offer in Compromise program might be a useful resource. More taxpayers may now more easily qualify for an OIC thanks to the program, which opens up a road to financial assistance.
But obtaining an OIC may be difficult, and it's usually preferable to work with a tax expert to do this. For assistance, get in touch with this office.
