Offer In Compromise

Offer-In-Compromise (OIC):

An offer in compromise allows you to settle your tax debt for less than the full amount owed.  It may be a legitimate option if you can’t pay your full tax liability or doing so would create a financial hardship.  The IRS will consider your equity in assets and your ability to pay by analysis of your income and expenses.  The IRS will generally accept an offer in compromise when the amount offered represents the most they can expect to collect within a reasonable period of time.  The service refers to this amount as the full collection potential. 

Graphic – Net Realizable Value of Assets + Calculation of Future Income = Full Collection Potential (ie acceptable offer)

The calculation of your ability to pay is referred to as “The Calculation of Future Income”.  Future income is defined as an estimate of the taxpayer’s ability to pay based on an analysis of gross income less normal living expenses for a specific number of months into the future.  The number of months used depends on the payment terms of the offer.  

Payment Terms

(1)If the offer is paid in 5 or fewer installments in 5 months or less the calculation of future income is limited to 12 months worth.  So for example your monthly ability to repay is $300 per month.  The calculation of future income is than $300 X 12 which is $3,600. 

(2)If the offer will be paid in more than 5 installments or more than 5 months up to a maximum of 24 months the calculation of future income is 24 months worth.

You must be current with all your filings before the IRS will even consider your offer.  You are not eligible for an OIC if you are in open bankruptcy proceeding.  Your offer is automatically accepted if the IRS does not make a determination within two years of the IRS receipt date.  There is also a “Bad Boy Policy” which says that if the taxpayer doesn’t stay compliant for 5 years the IRS can reassert the forgiven tax liability.

A completed offer in compromise package will include:

• Form 433-A (OIC) for individuals or 433-B(OIC) for businesses and all required documentation as specified on the forms
  
• Form 656
  
• $150 application fee (non-refundable); and
  
• Initial payment (non-refundable) for Form 656
  

Your initial payment will vary based on your offer and the payment option you choose:

Lump Sum:  Submit an initial payment of 20 percent of the total offer amount with your application. Then pay the remaining balance of the offer in 5 or fewer payments after receiving written acceptance of your offer from the IRS.

Periodic Payment:  Submit your initial payment with your application.  Continue to pay the remaining balance in monthly installments while the IRS considers your offer.  If accepted, continue to pay monthly until it is paid in full.  

While your offer is being processed by the IRS:

• Your non-refundable payments and fees will be applied to your tax liability (you may       designate payments to a specific tax year and tax debt):
  
• Other collection activities are suspended!
  
• The collection statute expiration date is extended
  
• A notice of federal tax lien may be filed
  

What happens if your offer is accepted:

• You must meet all the offer terms listed in section 8 of Form 656 including filing all required tax returns and making all payments;
  
• Any refunds due within the calendar year in which your offer is accepted will be applied to your tax debt;
  
• Federal tax liens are not released until your offer terms are satisfied
  

What happens if your offer is rejected:

If your offer is rejected you can fight on.  You may appeal a rejection within 30 days using Form 13711 Request for Appeal of Offer in Compromise