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The Offer in Compromise (referred to most often as “OIC”) program provides an opportunity to settle your tax liabilities with the Internal Revenue Service (IRS) for less than the full amount owed. For your information, most states have a similar program.

There is a lot of media advertising with firms stating they can help clients resolve their IRS liability for cents on the dollar. That is misleading as it is a challenging process that takes time and experience to successfully negotiate an OIC. Unfortunately, many taxpayers fall for this advertising and end up paying fees with little likelihood of success getting their OIC accepted.

To qualify for an OIC, specific criteria must be met, including the filing of all tax returns (a minimum of the last 6 years), receipt of a bill for at least one tax debt included in the offer, and compliance with estimated tax payments or sufficient withholding to cover the accrued wages and other income for the current year. For businesses, companies must fully comply with federal tax deposit requirements for business owners with employees.

It’s important to note the IRS typically accepts an OIC only if the amount offered is equal to or greater than the reasonable collection potential (RCP). An IRS employee will thoroughly evaluate your ability to pay based on assets, income, and allowable expenses. There is a very in-depth collection information statement (financial statement) – form 433-A(OIC) that must be completed and submitted as part of the offer package. The accurate completion of that form with supporting documentation is critical to acceptance of the OIC.

There are three main reasons the IRS may accept an OIC:

  1. Doubt as to liability: When there’s a genuine dispute regarding the existence or amount of the correct tax debt. For example, an audit may have been conducted, but documents that were previously unavailable during the audit can now be presented to reduce the revised tax liability.
  2. Doubt as to collectibility: If your assets plus the sum of the potential monthly payments (based upon your income less allowance expenses) are less than the full amount of the tax liability. In other words, there is no way you can pay off in full what you owe (including the accrual of interest and penalties) before the 10-year statute for collection expires.
  3. Effective tax administration: When paying the full amount owed would create economic hardship or be unfair due to exceptional circumstances. This is the least common form of OIC and the most challenging to get accepted.

The specific forms required for submission depend on the basis of the OIC. A non-refundable application fee (currently $205) is generally required, except for cases based on doubt as to liability or for individuals who qualify for the low-income exception.

Payment options include lump sum cash offers or periodic payment offers, each with specific requirements and nonrefundable payments. Generally, a lump sum offer requires a smaller overall payment than a periodic payment offer.

If your OIC is accepted, you must comply with all tax laws, including the timely filing returns and paying taxes for five years from the date of acceptance. Failure to comply may result in default, leading to collection of the original amounts owed plus interest and penalties.

If your OIC is rejected, you have the right to appeal within 30 days. However, if the offer is returned due to missing information or other reasons, there is no right to appeal but you may resubmit the offer once the issues are resolved.

We hope this information helps you understand the OIC process. Please feel free to reach out if you have any questions or need assistance. The OIC process can be very challenging. Retaining a skilled and experienced professional to represent you can significantly improve the probability for OIC acceptance.