Requirements of an Offer in Compromise
The IRS allows individuals who meet qualification and eligibility requirements to settle their federal tax liability with an offer in compromise. An attorney who specializes in tax law can explain federal regulations and necessary qualifications.
What is an Offer in Compromise?
An offer in compromise (OIC) is an agreement between the Internal Revenue Service and a taxpayer that allows the taxpayer to settle his/her tax liabilities for less than they owe. In most cases, a taxpayer will not be granted an offer in compromise unless the proposed payment is at least equal to or more than the amount that’s reasonably collectible. The IRS measures a taxpayer’s ability to pay the settlement amount by evaluating his/her assets, such as real property, other property, automobiles, and bank accounts. The IRS may also evaluate the taxpayer’s anticipated future income, then deduct certain amounts allowed for basic living expenses.
What are the Qualifications?
To qualify for an OIC, a taxpayer must meet specific requirements:
- The taxpayer must have filed all necessary tax returns for previous tax years
- The taxpayer must have made all estimated tax payments for the current tax year
- If the taxpayer is a business owner with employees, he/she must have submitted federal tax deposits required for the current tax quarter
Typically, an application fee must be submitted for the amount listed on Form 656. If the offer in compromise is based on doubt of liability, or an individual taxpayer qualifies for low-income under federal poverty guidelines, the application fee is waived.
Regulations for Acceptance
If a taxpayer qualifies for an OIC, three regulations govern acceptance:
- Doubt of Liability – If there is a genuine dispute concerning the correct amount of federal tax owed, the IRS can accept a compromise.
- Doubt of Collectibility – If the taxpayer’s income and assets equal less than the full amount of tax owed, the IRS can accept an offer in compromise based on the fact that the tax liability can’t be reasonably collected.
- Effective Tax Administration – If the IRS determines that the taxpayer owes the tax and has the ability to pay, but payment in full would create an economic hardship for the taxpayer, they can accept a compromise.
If the IRS accepts an offer in compromise, the taxpayer must fully comply with tax laws and avoid further tax delinquencies. If acceptance terms are not met, the IRS can place the OIC in default, consider the agreement null and void, and collect the entire amount of the tax liability, fewer payments made, plus interest and penalties. The IRS can also apply current tax refunds to the tax liability. If an offer is accepted based on doubt of collectibility or effective tax administration, the taxpayer must file timely tax returns and pay taxes owed in a timely manner for five years from the date of the OIC acceptance.
Are Payment Terms Accepted?
In most cases, taxpayers will not qualify for an offer in compromise if they have the ability to pay the tax liability in full or through an installment agreement. Individuals who do qualify have two payment options:
Lump Sum Cash Offer
If a taxpayer selects the lump sum cash option, he/she may pay the tax amount owed per the OIC agreement in a lump sum or installment payments. When paid in installments, the total tax liability must be paid within five months after the offer is accepted by the IRS. A non-refundable payment equal to 20 percent of the tax liability must be paid with the OIC application.
Periodic Payment Offer
If the taxpayer chooses the periodic payment option, the tax liability can be paid in six or more monthly installments, but not to exceed a 24 month period after the offer is accepted by the IRS. The first installment payment must be paid with the application and is non-refundable. If the taxpayer is still being evaluated for a periodic payment offer, non-refundable installment payments must continue during the evaluation period.
What if the OIC is Rejected?
If the IRS rejects an offer in compromise, the taxpayer has the right to appeal through the IRS Office of Appeals. When an offer is rejected, the IRS notifies the taxpayer by mail. The letter explains the reason for OIC rejection and steps to take to file an appeal. The appeal must be made within 30 days from the date of the letter.
In certain cases, an OIC may be returned to the taxpayer rather than rejected. This can occur if the taxpayer fails to submit necessary information; fails to include the required application fee or first payment with the application; has not filed required tax returns; has not paid current tax liabilities; or files for bankruptcy. If the IRS returns an OIC to the taxpayer, there is no right to appeal, but the taxpayer can submit another offer.