This term refers to a tax settlement option offered by the IRS to taxpayers who cannot pay the full amount of taxes owed. It is only offered if the IRS deems the full debt owed unpayable, and impossible to pay off through payment plans, and will only be accepted if the IRS believes the offer being made is greater than or equal to a sum they could ever truly expect to receive from said taxpayer.

There are three main qualifications that the IRS will consider.

• Doubt as to Collectibility

  This qualification comes about if the IRS assumes reasonable doubt that the amount owed can be collected in the foreseeable future through usual collection procedures. To determine eligibility under these terms, the IRS considers several facets.

  First, they decide whether they would be able to collect a higher amount through forced collections than if they accepted the Offer in Compromise. If the OIC won’t garner them a higher amount, then it will likely not be accepted.

  To prove you cannot pay the amount owed, the IRS will look at your net equity in assets along with your projected monthly disposable income—this is known as reasonable collection potential, or RCP. If your RCP won’t see your debt paid in full before the collection statute expires, the IRS is more likely to accept your offer. The IRS will also consider the likelihood of the taxpayer’s financial situation improving. If it looks likely that it will, they may reject the offer and wait for the full amount to be paid.

• Doubt as to Liability

  This refers to doubt that the assessed tax liability is correct. This may be due to examiner error of the tax code, it may be that the examiner neglected to utilize all the evidence presented, or it could be that the taxpayer has found new documents to prove the debt assessed was incorrect.

• Effective Tax Administration

  Unlike the aforementioned causes for OIC approval, in the case of effective tax administration, there is no doubt regarding the stipulated tax amount owed. However, there may be individual circumstances that would mean forced collection would cause financial hardship, in which case the IRS would more likely consider accepting a taxpayer’s offer.

To qualify, you must be up to date with your tax filing, and not be involved in an open bankruptcy proceeding. You’ll also be required to describe your financial situation in details, which may necessitate pulling spousal financial reports.

This varies based on the situation, but most OICs are processed within several months’ time. There is no guaranteed timeframe for an IRS Offer in Compromise proceeding. It can take the IRS up to seven months to fully process your request, whether the outcome is acceptance or rejection.

During this decision process, taxpayers are still expected to make payments on any pre-existing plan, including the plan offered within your request. You will also still receive penalties during this period, but collection processes are paused during the deliberation time.

Filing for an IRS Offer in Compromise is complex; as such, it behooves those looking to find the best arrangement with the IRS to use a tax professional. There are various forms required, and the huge levels of documentation can make the process more complicated for those not well- versed in tax filings.

Beyond the multiple forms required, you’ll also be required to provide documentation of at least three months’ worth of income and expenses, including, but not limited to, housing costs, credit card statements, pay stubs, tax returns, health care, dependent care, and more. This gets even more complex should the Offer in Compromise refer to business taxes.

There are various payment plans to utilize should an Offer in Compromise be accepted, and your preferred payment option must be specified when you place your offer. These plans include a lump sum payment, or a periodic plan in which payments are made each month until the new agreed upon balance is paid off. A tax professional can help you determine which plan would work best for your circumstances.

Not all states have Offer in Compromise deals in place and if they do, the requirements are generally different from those imposed by the federal government. If you would like to file for an Offer in Compromise from the state, you will have to do so separately. If your IRS OIC is accepted, it’s likely your state request will also be approved, but this is not assured.

Yes. If your offering is accepted, you are expected to file your taxes and stay up to date on payments for five years following. Failure to do so could result in an OIC default, making you liable for the original debt, along with any additional fees and penalties that may have accrued in the time since.

If your OIC is rejected and you believe the IRS is wrong about your case, you can appeal the decision for up to 30 days after the initial rejection. If you have come into more evidentiary support for your case in the time following your original request, you’ll likely want to appeal and include this new information.

If your Offer in Compromise is accepted, the money saved by using a tax professional’s help is more than any fee you can expect to pay for filing services.

Filing for an OIC is not without its drawbacks. It requires copious amounts of documentation, can take a while to process, and involves high levels of scrutiny, making it a potentially difficult and intrusive process. Despite these roadblocks, an Offer in Compromise can and has made a huge difference in the lives of many facing insurmountable debt.

Hiring a professional is the best way to determine whether or not you qualify for OIC provisions, and gives you the best chance of settling your debt in a timely and reasonable manner. Community Tax has helped many clients receive fair and due IRS Offer in Compromise deals, erasing thousands of dollars in debt and ensuring our clients get out of hot water with the IRS.