An Offer in Compromise (OIC) is a program offered by the Treasury and IRS that allows taxpayers to settle their federal tax debt or liability for less than the full amount owed.
The OIC program can provide taxpayers, be it individuals or businesses, who are facing financial hardship a road back to financial stability. It is basically a debt forgiveness program.
To qualify for an OIC, taxpayers must first submit a formal offer to the IRS, along with documentation and a non-refundable application fee. Qualifying low-income individuals can get a fee waiver.
The offer must include the amount the taxpayer is willing to pay, and the terms of the settlement. This is outlined in their Form 656-B, Offer in Compromise Booklet.
If your refund is lower than expected, even after accounting for changes to tax laws and your own situation, you can contact a tax relief company that can represent you with the IRS or other federal agencies. They will either charge an upfront fee or take a portion of the refund they get back for you.
The IRS will then review the offer and determine if it is acceptable, based on the taxpayer’s ability to pay, income, the amount owed, and other factors.
The IRS will also consider the taxpayer’s ability to generate future income and whether the tax debt is collectible. In addition, the taxpayer must be in compliance with all current tax filings and payments, including filing all required tax returns and paying any taxes owed for the current year.
You can also use the Treasury’s pre-qualifier tool to see if your tax debt and financial situation would allow you to qualify for an OIC.
The IRS uses a two-part evaluation process to determine a taxpayer’s ability to pay. The first step is to determine the taxpayer’s reasonable collection potential, which is the amount the IRS believes it can collect from the taxpayer based on their financial situation.
The second step is to compare the reasonable collection potential to the amount owed, to determine if the offer is acceptable.
If the offer is accepted, the taxpayer must pay the agreed upon amount in full, or through a payment plan, within 24 to 36 months. Once the OIC is accepted, the taxpayer is expected to fulfill their obligations and comply with all tax laws.
If the taxpayer fails to comply with the terms of the OIC, the agreement will be null and void, and the full amount of the tax debt will become immediately due, include any outstanding interest and penalties.
It is important to note that not all taxpayers will qualify for an Offer in Compromise. The IRS is only required to consider an OIC if it believes that the amount offered is equal to or greater than what it can realistically collect from the taxpayer.
Additionally, if the taxpayer’s financial situation improves, the IRS may request additional payments or cancel the OIC agreement.
The process of obtaining an OIC can be complex, and it is highly recommended that taxpayers seek assistance from a tax professional. A tax professional can assist with the preparation and submission of the OIC, as well as negotiate with the IRS on the taxpayer’s behalf.
In conclusion, an Offer in Compromise is a viable option for taxpayers who are facing financial hardship and are unable to pay their full tax debt. But make sure you qualify and are aware of the repayment terms before entering into an OIC agreement.
Note that many state tax or revenue agencies also offer tax debt forgiveness or compromise programs, so you should check your local state tax agency website for more details.