If you can’t pay your full tax liability, an Offer in Compromise (OIC) may be an option to settle your tax debt for less than the full amount owed. Note, however, most OICs are not approved by the IRS, and even when accepted they may still pose a challenge to those with significant tax debts and a limited ability to pay.
An Offer in Compromise (OIC) is a proposal to the IRS made by individuals who cannot pay their full tax liability or where doing so would create a financial hardship. The IRS looks at your ability to pay, income, expenses and asset equity, and applies an objective test to determine what offer it will accept. If your OIC is approved, you can settle your tax debt for less than the full amount owed.
The 2017 IRS Data Book shows that out of the 62,000 offers received by the IRS that year, 25,000 were approved. The total dollar amount of the offers accepted was $255 million, up from $225 million in 2016. The reason for the increase is most likely the increasingly flexible terms brought forth by IRS taxpayer relief initiatives in recent years.
An OIC may be accepted by the IRS if it is submitted for one of the following reasons:
- Doubt as to liability. This is where there is a genuine dispute as to the amount of the tax owed, if any at all.
- Doubt as to collectability. This is where a taxpayer’s assets and income are less than the amount of tax owed, and it is questionable whether the full amount of the debt could be paid.
- Effective tax administration. Even if the tax is definitely owed and the taxpayer is capable of paying it, the IRS may approve an OIC if payment would (1) create an economic hardship or (2) would be unfair due to exceptional circumstances.
While Offers in Compromise have become easier to get in recent years, still more than half are not accepted and they are hardly an easy way out for those with significant tax debts and a limited ability to pay.
The IRS Offer in Compromise Pre-Qualifier Tool is available to help you confirm your eligibility and prepare a preliminary proposal. The pre-qualifier uses the same computation as the OIC to determine whether the amount offered is the most the IRS can expect to collect from you within the 10-year Offer in Compromise statute of limitations (collection) period.
Note that to be eligible for an OIC, you must be current with all of your tax filings and payment requirements. You do not qualify for an OIC if you are currently in bankruptcy proceedings.
Under 26 U.S. Code § 7122 (c)(1) you must attach a partial payment of your proposed offer with your OIC paperwork:
- Lump sum payment offer. If the offer is for a “lump sum payment” (payable in 5 or fewer installments), it must be accompanied by payment of 20% of the amount of the offer.
- Periodic payment offer. If the offer is for a “short-term periodic payment” (payable in 6-24 monthly installments) or a “deferred periodic payment” (payable in more than 24 months but less than the 10-year statute of limitations period), it must be accompanied by the amount of the first proposed installment.
If the Offer is accepted
If your OIC is accepted, you must meet all the payment terms set forth in Form 656, Section 7. In addition, you will not be eligible for a tax refund in that tax year, but any amounts paid will be applied to their tax debt. Federal tax liens, if any, may be released when all terms of your offer have been satisfied.
If the Offer is rejected
If your OIC is rejected, you can appeal within 30 days by completing Form 13711 (Request for Appeal of Offer in Compromise).
Seek expert tax assistance with your Offer in Compromise
If you wish to submit an Offer in Compromise to the IRS, it is imperative that you make sure that you have correctly computed your net equity and monthly disposable income, and that you are able to pay your proposed settlement amount. Nearly all taxpayers seek the services of an experienced tax attorney to assure that all assessments are accurate and that other alternatives are explored.
The full service tax firm of Moskowitz LLP has assisted many taxpayers in negotiating their tax liability with the IRS and the firm’s knowledgeable tax attorneys are available to work with you. To review your eligibility for an Offer in Compromise, contact our San Francisco office today.