An Offer in Compromise (OIC) is a program offered by the Internal Revenue Service (IRS) that allows qualifying taxpayers to settle their tax debt for an amount less than the full balance owed. This program is designed for individuals who cannot pay their full tax liability or doing so would create financial hardship.
Eligibility and Requirements
To be eligible for an OIC, a taxpayer must meet specific criteria established by the IRS. These criteria include:
- Inability to Pay: The taxpayer must demonstrate that they are unable to pay the full tax liability either through a lump sum or a payment plan over time.
- Reasonable Collection Potential (RCP): The IRS assesses all of the taxpayer’s reasonable assets and future income. The offer amount should generally reflect the taxpayer’s RCP.
Some other prerequisites for eligibility include filing all required tax returns and making all required estimated tax payments for the current year.
Types of Offers
There are three main types of OICs:
- Doubt as to Collectibility: When the taxpayer cannot pay the tax due to financial hardship.
- Doubt as to Liability: When the taxpayer disputes the accuracy of the tax amount owed.
- Effective Tax Administration: When exceptional circumstances exist, and collection of the full tax liability would create an economic hardship or would be unfair and inequitable.
Application Process
The process of applying for an OIC involves several steps:
- Gathering Financial Information: The taxpayer must provide detailed financial information, including income, expenses, and assets.
- Submitting Forms: The primary forms involved are Form 433-A (OIC) for individuals and Form 656, the Offer in Compromise form.
- Paying the Application Fee: A non-refundable application fee must be included unless the taxpayer qualifies for a low-income certification.
Example and Practical Application
For instance, consider a taxpayer who owes $50,000 but can only afford to pay $10,000 without creating financial hardship. They might submit an OIC for the $10,000 with supporting financial documentation, demonstrating their inability to pay the full amount due.
Historical Context
The concept of the Offer in Compromise has evolved over time to allow the IRS to efficiently collect owed taxes while also providing relief for taxpayers in dire financial situations. The program, as it exists today, was significantly redefined in 1992 to better streamline and standardize the process.
Related Terms
- Installment Agreement: An arrangement with the IRS to pay tax debt over time.
- Currently Not Collectible Status (CNC): A temporary status where the IRS does not actively collect on a tax debt due to the taxpayer’s financial situation.
FAQs
What happens if my OIC is rejected?
How long does it take for the IRS to process an OIC?
Can I apply for an OIC if I am in bankruptcy?
References
- IRS. “Offer in Compromise.” Available at: IRS Offer in Compromise
- National Taxpayer Advocate. “Annual Report to Congress.” Available at: National Taxpayer Advocate
- Taxpayer Advocate Service. “Qualifying for an Offer in Compromise.” Available at: Taxpayer Advocate Service
Summary
The IRS Offer in Compromise program provides a crucial lifeline for taxpayers struggling to meet their tax obligations. By allowing eligible individuals to settle their tax debts for less than the full amount owed, the program offers a pathway to financial relief and a chance to regain tax compliance. Proper understanding and preparation are essential to successfully navigating the OIC application process.
