How to Get an Offer in Compromise Approved and Other FAQs
The IRS Offer in Compromise program is very popular because it allows you to pay off your IRS tax debt for less than you owe. However, this program can be confusing because it has very specific rules, and the application process is lengthy. To help you prepare for the IRS OIC, we've put together this list of frequently asked questions.
1. What is an Offer in Compromise IRS?
An IRS OIC is a tax settlement method offered by the IRS. It allows taxpayers to settle their taxes for less than they owe. In fact, the IRS only accepts these offers if it believes that the taxpayer cannot pay the tax liability in full or through a monthly payment plan. Furthermore, the IRS also must believe that the offer is equal to or greater than the amount the agency could expect to collect based on the taxpayer's current monthly income, future income, assets, and expenses.
2. How to get an OIC with IRS?
To get an OIC with the IRS, you need to apply using Form 656. If you're applying due to financial hardship, you also must include 433 forms that give the IRS a detailed look at your finances. If you're applying based on doubt as to liability, you don't need the 433 forms, but you do need to make a compelling case about why you don't owe the tax and it should be lowered.
3. What are the requirements for an Offer in Compromise?
There are three different ways that a taxpayer can qualify for this program.
- Doubt as to Collectibility — You can't afford to pay the whole tax liability so there is a doubt that the IRS would be able to collect the full bill.
- Doubt as to Liability — There is a legitimate doubt that you actually owe the tax, and you can substantiate your claim with tax laws and proof.
- Effective Tax Administration — You can potentially afford to pay the tax bill, but requiring you to do so would create an economic hardship or be unfair.
The exact requirements vary based on the program you select. Check out this link for more details on qualifications and requirements for an Offer in Compromise.
4. What forms do I need to request an Offer in Compromise?
Requesting an IRS OIC is complicated and requires lots of forms and supporting documentation. Here are the forms you need.
- IRS Form 656-B — This is the OIC booklet for people who are applying based on doubt as to collectibility or effective tax administration. The booklet contains Form 656, 433-A (OIC), and 433-B (OIC).
- IRS Form 656-L — If you are applying for an OIC because you have serious doubts that you owe a certain amount or anything at all to the IRS, then you will need to use IRS Form 656-L.
- Supporting documents — If you're applying based on doubt as to collectibility, you also need three months of documentation on just about every expense and income source. This includes pay stubs, credit card statements, copies of bills related to housing and utility expenses, investment statements, proof of transportation costs, daycare expenses, tax returns, etc. Photocopies will suffice as the IRS does not want originals.
Check this link for more details on supporting documentation and IRS OIC forms.
5. What is the Offer in Compromise fee?
As of 2022, the offer in compromise fee is $205. This is non-refundable. If you meet the low-income certification guidelines, you don't have to pay this fee, but you need to make sure you tick the right box on your application form or the IRS will return your paperwork.
In addition to the fee, you will need to make an initial payment. This payment is generally 20% of your offer if you're making a lump sum offer. If you're applying to make payments on an offer, you need to include the first payment. Then, you should continue sending in payments until the IRS approves or denies your offer. If the IRS rejects your offer, you won't get the payment back. It will be applied to your tax bill.
6. How hard is it to get an Offer in Compromise?
It can be difficult to get an offer approved. The IRS rejects most OIC applications. To convince the Internal Revenue Service to settle your tax debt for less than you owe, you need to prove the offer is the most you can pay.
The compromise process requires a lot of paperwork that can be confusing and time-consuming. Essentially, you provide the IRS with detailed financial information so that the IRS can decide whether or not to reduce your tax debt.
On top of that, you also have to make an initial payment and stay compliant with tax regulations. For example, you must make your required estimated tax payments and federal tax deposits if applicable. If you don't understand all the rules, it can be hard to get your IRS offer accepted. The compromise process is easier if you work with an experienced tax pro.
7. How to get an Offer in Compromise approved?
To get your IRS offer approved, you need to fill out the forms correctly and make sure that you provide all of the right supporting documentation. If the Internal Revenue Service asks for more information, make sure to provide it within the stipulated time frame. Usually, you have two weeks.
Remember that if the IRS accepts your offer, the compromise process is not over. You must stay compliant with tax filing and reporting guidelines. If you don't, you can lose your IRS offer and the entire tax bill will be due. You have the best rates of approval if you work with an experienced tax lawyer, CPA, or enrolled agent.
8. How much should I offer in compromise to the IRS?
Your IRS offer should reflect your reasonable collection potential. Generally, the IRS will only reduce your tax debt owed if you convince the agency that your offer is the most they are likely to get. To do this, you need to fill out the IRS forms correctly and provide the agency with the information they need to make a decision.
The OIC application forms guide you toward the right offer. These forms can help you calculate how much you should offer based on the equity in your assets, your disposable monthly income, and your future earning potential. If you're applying based on doubt as to liability, your offer should reflect the amount that you think you really owe. It should not include the amount that you don't think you owe.
9. Will the IRS accept My Offer in Compromise?
The answer depends on your unique tax situation. During the compromise process, the IRS looks over your financial details to decide whether or not to accept your offer. If the IRS thinks that you can pay the tax bill in full or by making monthly payments, the agency will not approve your offer. Note that the agency considers your current situation plus your future income.
If you contact a tax debt resolution company and they claim that you can get an offer approved without looking at your situation, you should not work with that company. Instead, you should work with a local pro who can give your case the attention it needs. They can look over your situation and give you a good idea if approval is likely in your situation.
Note that this answer applies to doubt as to collectibility. If you're applying for doubt as to liability, the IRS doesn't look at your finances. Instead, it takes into consideration your interpretation of the tax laws and other situations related to the legitimacy of your tax bill.
10. Should I use a licensed tax professional to help?
Yes. The compromise process is fairly complex and a tax professional who provides OIC tax services can greatly increase your chances of getting your offer accepted. Remember, if a licensed tax professional does not believe you are a good candidate for an Offer in Compromise, they will help you find the next best option for you to resolve your taxes with the IRS.
At TaxCure, we are a marketplace for tax resolution professionals and we have made it easy for taxpayers to find the best tax professional to help with their unique tax problems. You can start your search below by selecting the agency or agencies that you have problems with. You can then further filter your search by a particular problem you have or a solution you are looking for (i.e. Offer in Compromise). Then, you get results for professionals that have that unique experience, and you can start reaching out to them for free consultations until you find the right fit for your needs.
11. Can anyone qualify for an Offer in Compromise?
No. It is actually unlikely that the IRS accepts an Offer in Compromise filing. In fact, in 221, the IRS only accepted 30% of OICs requested. The IRS will only accept those people that it thinks are highly deserving of the program. Before considering this type of resolution option be sure to read through the requirements in detail to see if you meet them.
12. How long does Offer in Compromise take?
Filing out the Offer in Compromise application can be a time-consuming process. Expect to spend hours on the applications. The time needed for gathering the supporting documentation can vary depending on how well organized your records are and your level of tech-savvy.
For instance, if you know how to download bank statements from your bank's website, that will be a lot faster than if you have to call the bank and request to have them mailed to you. Similarly, if you have a statement for your retirement account on hand, it doesn't take much time to make a copy, but if you have to request a statement from your HR department, that will take longer.
The timing can also vary based on the complexity of your finances and whether you're applying for a business or an individual. The more complex your finances, the longer the application process will take.
Typically, it takes six to nine months on average for the IRS to respond to your offer in compromise application. Staff, funding, and the time of the year the OIC gets submitted all influence the time involved in the decision process. If more than two months have passed, you should check with the IRS to see how the process is moving along. It is common for the IRS to take up to six months to make a decision. Some decisions can take over a year.
If the IRS hasn't responded to your offer, you should follow up to make sure the agency received your application. If the IRS doesn’t respond to you within two years after receiving your application, your offer is automatically approved.
13. What if my offer was rejected and I don’t agree with the decision?
If you don’t agree with the IRS’s decision, you have the right to appeal the decision. Sometimes, the IRS issues a rejection because of a lack of information. In other cases, the IRS may reject your application because the offer is too low and the agency thinks you can pay more.
If you have more details, you should definitely appeal. You should also appeal if you disagree with some of the elements listed in the rejection notice or if you have special circumstances that you want the IRS to consider. For instance, if you think that the IRS has overinflated your future income, you should explain why in your appeal. You have 30 days from the denial to start the OIC appeal.
14. I owe state taxes as well. Will the state accept my Offer in Compromise?
The IRS does not handle state taxes. Unfortunately, if you want to apply for an Offer in Compromise on your state tax bill, you have to do that separately. Not all states offer this type of settlement and they may have different ways of determining if you qualify.
As a result, if the IRS accepts your offer, that increases the chance that the state will accept an Offer in Compromise, but it is not guaranteed. Some states will not reduce tax debts under any circumstances. Check out the state taxes page, and then, follow the link to your state to see if it offers an OIC program.
15. How much does an Offer in Compromise attorney charge?
The fees for this type of filing can range from $3,500 to $6,000, but it depends. The amount could be higher or lower than this range. Many factors influence the price you will pay for assistance with an Offer in Compromise. First of all, the company or professional you select will be a factor. Second, pricing depends on the complexity of the tax issues and the amount of time required to prepare the documents and handle negotiations on your behalf. This may sound like a lot, but if your offer is accepted, you will save a lot more money in taxes than you pay in fees.
16. Will the IRS file a tax lien after I submit my offer?
The IRS may file a Notice of Federal Tax Lien during consideration of your offer. However, the IRS will release the tax lien 30 days after payment terms are met and the payment is verified.
17. How do I pay an offer in compromise?
You pay an IRS offer in a lump sum or in monthly payments over two years. You select the payment option when you submit your application. Generally, you have to make a larger offer if you want the payment plan compared to the lump sum. The IRS takes more of your future income into account when you opt for payments on your OIC.
When in doubt, work with a licensed tax professional who has experience filing offers in compromise. You can use TaxCure to search for a local pro in your area with the experience you need.
Disclaimer: The content on this website is for educational purposes only and does not serve as legal or tax advice. For specific advice regarding your tax situation, contact a licensed tax professional or tax attorney.