An Offer in Compromise (OIC) is a program offered by the Internal Revenue Service (IRS) that allows taxpayers to settle their tax debt for less than the full amount owed. This option is available to those who cannot pay their full tax liability or if doing so would create a financial hardship. The IRS considers various factors such as the taxpayer’s ability to pay, income, expenses, and asset equity before accepting an offer.
Acceptance rate
The acceptance rate for Offers in Compromise can vary. Historically, the IRS has accepted about 40% of the offers submitted. This rate can fluctuate based on the economic environment and changes in IRS policies. It’s important to note that the IRS is stringent in its evaluation process, ensuring that only those who genuinely cannot pay their full tax liability are granted relief.
Who is eligible?
To be eligible for an Offer in Compromise, taxpayers must meet several criteria:
- Filing requirements: All required tax returns must be filed.
- Estimated payments: All required estimated tax payments for the current year must be made.
- Federal tax deposits: Employers must have made federal tax deposits for the current and past two quarters.
- Bankruptcy status: The taxpayer must not be in an open bankruptcy proceeding.
Additionally, the IRS provides an Offer in Compromise Pre-Qualifier Tool on their website to help taxpayers determine their eligibility before applying.
How to apply
Applying for an Offer in Compromise involves several steps:
- Complete the application package: This includes Form 433-A (OIC) for individuals or Form 433-B (OIC) for businesses, along with all required documentation. Form 656 must also be submitted for each tax debt (individual and business tax debts must be submitted on separate forms). Also note that, If you’re an employer before you apply, you must make federal tax deposits for the current and past 2 quarters.
- Application fee: A non-refundable application fee of $205 is required, unless the taxpayer meets the low-income certification guidelines.
- Initial payment: Depending on the payment option chosen, an initial payment must be included with the application. There are two payment options:
- Lump sum: Submit an initial payment of 20% of the total offer amount with the application. The remaining balance must be paid in five or fewer payments if the offer is accepted.
- Periodic payment: Submit the initial payment with the application and continue to pay the remaining balance in monthly installments while the IRS considers the offer.
- Mail the application: The completed application package must be mailed to one of the two designated IRS processing centers listed on Form 656-B.
After submission
Once the application is submitted, the IRS will review it and may request additional information. If the offer is accepted, the taxpayer will receive written confirmation and must adhere to the agreed payment terms. If the offer is rejected, the IRS will return the application fee and apply any payments made to the taxpayer’s outstanding balance.
