Requirements For an Offer in Compromise

Tax Law Definitions: Offer In CompromiseUnder the right circumstances, people who owe back taxes can settle with the IRS for a flat sum. It’s called an “offer in compromise,” and a tax lawyer can explain how to qualify.

What is an offer in compromise?

A tax lawyer can negotiate an offer in compromise (OIC) amount, which is typically less than the full amount owed. Generally, the IRS considers taxpayers’ assets, such as property and financial accounts, to determine acceptable offers. The IRS may also look at anticipated future income, less essential living expenses.

What are the Qualifications?

To qualify for an OIC, a taxpayer must:

  • File all the necessary tax returns for the current year;
  • Pay the $186 application fee;
  • Make all estimated current year tax payments; and
  • If the taxpayer is a business owner with employees, he/she must have paid all required tax deposits for the current quarter.

Authorities will waive the application fee if the offer in compromise is based on liability doubt, or the individual qualifies for low-income assistance under federal poverty guidelines.

Regulations for Acceptance

Three regulations govern OIC 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 are less than the full amount of tax owed, the IRS can accept a compromise based on inability to pay.
  • Effective Tax Administration: If the IRS determines that a taxpayer can pay taxes in arrears, but payment in full would create an economic hardship for the taxpayer, the agency can accept a compromise.

If the IRS accepts an offer in compromise, the taxpayer must fully comply with tax laws and avoid further delinquencies. If the payer shirks acceptance terms, the IRS can place the OIC in default, consider the agreement null and void, and collect the entire liability amount — less payments made, plus interest and penalties. The IRS can also apply current tax refunds to the tax liability.

If the IRS accepts an offer based on doubt of collectibility or effective tax administration, the taxpayer must file timely tax returns and pay taxes owed promptly for five years from the date of the OIC acceptance.

Offers In Compromise: Payment Terms

Typically, taxpayers with the ability to pay tax liabilities in full will not qualify for an offer in compromise. Individuals who do qualify have two payment options.

Lump Sum Cash Offer

If taxpayers select the lump sum option, they may pay the amount all at once or in installments. When the latter, payers must remit the total amount within five months after offer acceptance.

Periodic Payment Offer

If taxpayers select the periodic payment option, they can pay the liability  in six or more installments over a 24-month period. Payers must remit the first non-refundable installment payment with the application. During the IRS evaluation period, taxpayers must continue to make non-refundable installment payments.

What if the IRS Rejects My OIC?

When the IRS rejects offers in compromise, taxpayers can appeal through the IRS Office of Appeals. If the IRS rejects your offer, it will notify you by mail with an explanation letter that outlines appeal steps.

In certain cases, an the IRS may return an OIC instead of rejecting it. This can occur if the taxpayer fails to submit necessary information; fails to include the required application fee or first payment with the application; doesn’t filed required tax returns; doesn’t pay current tax liabilities; or, files for bankruptcy. If the IRS rejects an OIC, applicants can’t appeal, but they can submit another offer.

Connect With A Tax Lawyer

Do you need help settling past tax debts? If so, we are here o help. We have saved countless individuals and businesses money by successfully negotiating offers in compromise with the IRS. Get in touch today to begin the conversation. The consultation is on us.

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