Article Highlights:
Purpose of an Offer in Compromise
Requirements for Filing an OIC
Application Fee and Partial Payment Requirement
Possible Upfront Payment Waivers and Low-Income Offers
Grounds for an OIC
OIC Procedures and Processing
Accepted and Rejected Offers
Analysis of a Taxpayer’s Financial Information
Lump Sum and Periodic Payments
Tax Liens
An Offer in Compromise (OIC) is a program given by the Internal Revenue Service (IRS) that enables taxpayers to settle their tax bills for less than the total amount due. This program is especially advantageous for those who are unable to pay their entire tax burden or if doing so would cause financial hardship. The goal of an OIC is to help financially troubled people address their tax issues in a way that is fair and equitable to both the individual and the government.
An OIC's principal objective is to promote tax debt settlement for taxpayers who are unable to pay their whole tax liability. By enabling taxpayers to settle their obligations for less than the entire amount, the IRS hopes to collect what it can rather than risk collecting nothing if the taxpayer files bankruptcy or continues unable to pay. This program also helps taxpayers avoid the long-term financial pressure and worry that comes with unpaid tax obligations.
Before filing an OIC, taxpayers must make sure that all necessary tax returns have been submitted. The IRS will not accept an OIC application if the person owes taxes or is in bankruptcy. Additionally, taxpayers must be current on their projected tax payments for the current year, and employers must have made tax deposits for the current and previous two quarters before enrolling. If these standards are not satisfied, the IRS will return the application without consideration, but any first payment made with the offer will be put to the outstanding tax liability.
An OIC needs a $205 application fee. Individuals or sole proprietors whose household gross income falls below the low-income threshold may be exempt from paying this tax. Along with the application cost, taxpayers must provide a nonrefundable upfront payment. For lump-sum offers, 20% of the offer amount must be paid with the application, with the remainder payable in five or fewer payments within five months after acceptance. For periodic payment offers, the first payment must be made with the offer, with the remaining amount due within 6 to 24 months, depending on the suggested conditions.
The Taxpayer First Act, which amends the Internal Revenue Code, waives the OIC application cost for people whose adjusted gross income (AGI) does not exceed 250% of the relevant poverty threshold. Taxpayers who meet these conditions are not obliged to make an initial payment with their offer.
An OIC might be based on doubts about responsibility, collectability, or the desire to improve efficient tax administration.
When there is a real disagreement over the existence or size of the tax obligation, there is uncertainty about accountability.
Doubts about collectability occur when the taxpayer's assets and income are inadequate to cover the whole amount.
Offers based on efficient tax administration are considered when collecting the whole amount would cause economic hardship or be unjust owing to unusual circumstances.
The OIC procedure starts when the taxpayer submits a request for an offer in compromise, together with the required financial documents. Individuals, including self-employed people, may make an offer, as can businesses. The IRS will thoroughly examine the taxpayer's financial status, including their income, spending, assets, and obligations.
The IRS employs national and local criteria to evaluate permissible living costs that are necessary for the taxpayer's health and welfare or for the generation of revenue. If a taxpayer's spending exceed these guidelines, they must offer adequate proof.
If the IRS accepts an OIC, the taxpayer will get written notification, and timely payment and adherence to the offer conditions are necessary to avoid default. Once the payment requirements are satisfied, the IRS will release any Notices of Federal Tax Lien issued to the taxpayer. For offers over $50,000, a formal opinion from the IRS Chief Counsel is necessary.
Rejected bids are not regarded final until the IRS provides a formal notice of rejection. Taxpayers have the right to seek a meeting to explore alternative options or to register a protest and appeal within 30 days after denial. The application price is not reimbursed; however, taxpayers may submit another offer with a new application fee.
The IRS undertakes a thorough examination of the taxpayer's financial information to estimate the amount of disposable income available to pay the tax bill. This study examines the taxpayer's income, expenditures, and assets to determine their capacity to pay. The IRS expects taxpayers to pay a tax burden equivalent to the amount over and above essential costs.
The necessary cost test is used to assess whether expenses are required for the taxpayer's health and welfare or to generate revenue. Basic living expenditures including accommodation, utilities, food, transportation, and healthcare are all allowable expenses. Taxpayers must produce evidence for any costs that exceed the prescribed levels.
The IRS determines a taxpayer's reasonable collection potential based on their assets, projected income, and permitted living costs. Assets are evaluated based on their fast sale value, which is the amount the IRS estimates may be gained by selling the item promptly. The realizable value is the amount that the IRS anticipates collecting after accounting for any encumbrances.
Unemployed people may have significant obstacles in fulfilling their tax responsibilities. When reviewing an OIC, the IRS examines the taxpayer's present financial status, which may include unemployment. Taxpayers must produce proof proving their jobless status and any unemployment benefits received.
When filing an OIC, taxpayers have the choice of making one lump-sum payment or making recurring payments. Lump-sum offers need a 20% down payment, with the remainder due within a short period of time. Periodic payment offers allow for longer payment periods, which is beneficial to taxpayers with limited immediate resources.
The IRS may issue a Notice of Federal Tax Lien to safeguard the government's interests during the OIC inquiry. If the offer is accepted, the lien will be removed if the requirements are met. Taxpayers should be aware that tax liens might affect their credit and ability to acquire financing.
Filing an offer in compromise with the IRS is a difficult and time-consuming procedure that may benefit greatly from the guidance of a tax specialist. Tax specialists are knowledgeable about tax law and the particular criteria of the offer in compromise program, which may assist guarantee that the application is done correctly and effectively. They may evaluate the most appropriate sort of offer for the taxpayer's position, whether it is question about collectability, liability, or efficient tax management. Furthermore, tax specialists have prior experience dealing with the IRS, which may shorten processing timeframes and give useful insights into what the IRS looks for in a successful offer. Tax specialists may save taxpayers time and worry by managing the complicated documentation and any appeals, boosting the probability of a positive conclusion. Please contact this office for help.