An IRS offer-in-compromise, or OIC for short, generally allows certain taxpayers with IRS tax obligations to pay those taxes but at less than the full amount owed. An OIC may be a legitimate option for you if you can't pay your full tax liability, or doing so would create financial hardship. An OIC, however, is not for everyone, but if you meet all the qualifications, the IRS may agree to let you pay less than what you actually owe. Also, if you can fully pay your liability through an installment agreement or other means, you will not--in most cases--be eligible for an OIC.
So how does the process work and who may benefit? Well, in most cases, the IRS will not accept an OIC unless the amount offered is equal to or greater than what is known as your “reasonable collection potential” or RCP. The RCP is basically how the IRS measures your ability to pay. The RCP includes the value that can be realized from your assets, such as real property, automobiles, bank accounts, and other property. In addition to property, the RCP also includes anticipated future income, less certain amounts allowed for basic living expenses.
The IRS may accept an OIC based on three grounds:
- First, acceptance is permitted if there is doubt as to liability. This ground is only met when genuine doubt exists that the IRS has correctly determined the amount owed.
- Second, acceptance is permitted if there is doubt that the amount owed is collectible. This means that doubt exists in any case where the taxpayer's assets and income are less than the full amount of the tax liability.
- Third, acceptance is permitted based on effective tax administration. An offer may be accepted based on effective tax administration when there is no doubt that the full amount owed can be collected, but requiring payment in full would either create an economic hardship or would be unfair and inequitable because of exceptional circumstances.
Generally, you begin the process of applying for one with form 656 ,Offer-In-Compromise, and there is a $150 fee. We also offer a handy/useful video link that shows how to complete form 656. You also complete form 433-A (individuals) and that form is found in the 656 link above.
The IRS realizes that a lot of taxpayers are a bit more financially distressed than in the past so we began a program called "Fresh Start" a few years ago and have since expanded "Fresh Start" to the OIC program so folks can clear up their tax problems and in many cases more quickly than in the past.
Finally, be wary of advertisements with promises that sound too good to be true. Generally speaking, it’s rare that anyone can guarantee you anything without knowing your full and complete set of facts and circumstances. So if you choose to use a tax professional / tax representation firm to prepare and file your offer, protect yourself by selecting a qualified, credentialed tax professional. Click here for some key points to keep in mind.