How Does the IRS Offer in Compromise Program Work?

How Does the IRS Offer in Compromise Program Work?

by Harry Galstian

May 3, 2022

You Have Options 

If you have ever had a tax bill you couldn’t afford to pay, don’t be swayed by false ads promising “total IRS debt forgiveness.” In most cases, complete forgiveness of tax liability — except in the case of bankruptcy — is unlikely. But don’t think that you’re out of options just yet. Should the Internal Revenue Service (IRS) send you a letter saying you owe them tens of thousands of dollars, don’t avoid it.

How To Make An Offer In Compromise 

An Offer in Compromise could be the best tax relief option for you. The IRS’s Offer in Compromise (OIC) is a program that allows you to settle your back taxes for less than you owe. But don’t assume that you can just call the IRS, offer them a specific amount (for example, 50% of your debt), and the IRS will make an immediate decision to approve or deny it. Rather, the Offer in Compromise is a formal and rigorous program that requires:

  • Completed application form 
  • Application fee, typically $205
  • A down-payment and deciding on a lump sum or periodic payment plan offer, along with Form 656
  • Personal and/or business financial statements, including Form 433-A OIC
  • Substantiating documents, such as a mortgage, rent, automobile expenses, medical and health and insurance documents

The Three Main IRS OIC Categories 

Even if you submit all these documents and fees, you must still meet the strict qualifying criteria. An Internal Revenue Service Offer in Compromise will fall into one of three broad categories:

  • Doubt as to liability: Used if there is a genuine dispute about the amount you owe or whether you owe anything at all
  • Doubt as to collectibility: The IRS believes your tax debt may not be fully collectible due to your assets and income being less than the full amount of the tax liability
  • Effective tax administration: When there’s no doubt that you owe the full amount but paying in full would create a financial hardship or there are extenuating circumstances that would make it unfair for the IRS to collect the full amount

The Importance of Having An IRS OIC Representative

So let’s say you’ve decided to apply for an Internal Revenue Service Offer in Compromise. You’ve gathered all of the information and documents, and organized, packaged, and mailed them to the IRS. The next step in the process involves the Internal Revenue Service assigning your Offer in Compromise to a Process Examiner. This agent will review the information sent and correspond back if any additional information is needed. In some cases, they may reject or return the OIC based on incomplete information or documents. Since the OIC is a rigorous program that takes several months, not everyone who asks for one will be approved. Taxpayers who submitted an Offer in Compromise without a representative have had a much lower chance of having the Offer accepted, according to data from the IRS.

Reviewing the IRS OIC and Next Steps

Should the OIC make it past the Process Examiner, it will then go to an Offer Examiner. This agent’s job is to review the entire application and financial documents to reach a decision. As they review, the IRS will take into consideration your assets, income, expenses, and financial obligations. There are specific formulas that both the taxpayer and IRS need to follow to determine the reasonable collection potential, which is the lowest amount the IRS will consider to settle your entire debt.

Accepting the IRS OIC

Once the review is done, the IRS will reach a decision. If the IRS accepts your OIC, you’ll need to meet all the terms of your agreement. Should you fail to comply with the agreement, the IRS will assess you for up to the original amount of the tax debt plus penalties and interest (minus any payments you’ve made). But if the IRS rejects your offer, you’ll have 30 days to file an appeal. Additional financial analysis and Offer in Compromise guidelines need to be reviewed for the appeal process. In the event of an appeal, new information and documents need to be provided, along with a competent argument as to why the OIC should be accepted by the IRS.

Direct Tax Relief Can Help With Your IRS OIC

An Offer In Compromise is a complicated process and not a cure-all for back taxes. However, by finding the best tax relief options for your situation, you can confidently handle your tax debt. If you think you might be eligible for an OIC, take your time to go through the process with a tax relief specialist. With their help, you may be able to settle with the IRS for less than what you owe.

If you have a debt to the IRS or state for more than $10,000 and would like a free and confidential consultation to see how Direct Tax Relief can help resolve your debt with tax relief services. Call us a call at (800) 505-4134 to reach one of our tax resolution experts and get on your way to peace of mind.