IRS OIC Payment Options and How to Pay Offer in Compromise Online
There are two main payment options available with an IRS Offer In Compromise (OIC). When you fill out Form 656 for your offer in compromise application, you select one of two payment options for your offer. Want to know how OIC payments work? Wondering if you have to mail your payment or if you can pay your offer in compromise online?
Then, this guide is for you. It explains how OIC payments work and how to remit payment online or through the mail if your offer in compromise is accepted.
Type of OIC Payments
When you apply for the offer in compromise program, you can choose between two different payment options. Here are the two ways that you can opt to pay an IRS offer on your tax debt.
1. Lump Sum OIC Payment
Lump-sum offers must be paid in five payments or less. You must submit all payments within five or fewer months after the IRS accepts the offer. When you submit your application, you need to include 20% of your offer plus the application fee.
Here is an example of how a lump sum payment works. Say that you owe $150,000 in back taxes. You offer to settle in a lump sum of $100,000. You must send in $20,000 with your offer. This is your 20% downpayment, and it doesn't guarantee acceptance.
The IRS accepts your offer to make a lump sum OIC payment on May 1, 2022. At that point, you have five months to pay the remaining amount. To complete your payment, you must pay $80,000 in five or fewer installments by October 1, 2022. If you miss the OIC payment deadline, your offer is no longer valid.
2. Periodic OIC Payment
This is when you pay the tax debt settlement in monthly payments with a term shorter than 24 months but longer than five months. When you apply, you should send your first monthly payment and the application fee. While you wait for the IRS to respond, make the monthly payments as suggested by your offer. Then, if the IRS accepts your offer, continue making the payments until you’ve paid the whole offer amount. If you fail to make payments, the IRS will reject your offer and provide you with no appeal rights.
Here's an example of how the periodic payment work. Imagine that you owe $200,000 in back taxes and you offer to pay $120,000 over 24 months. Your monthly payments are $5,000 so you send in the first payment with your application. In a month, the IRS is still processing your OIC application so you send in your next $5,000 monthly payment. You continue sending in monthly payments until the IRS accepts your offer. Then, you complete the remaining payments on your offer until you have made 24 payments.
How to Make OIC Payments
When you submit your OIC application, you can include a personal check, cashier's check, or money order to make your payment, or you can pay online. Never send cash to the IRS. Unfortunately, you cannot make this payment with a credit card, but again, you can pay an offer in compromise online with a bank account.
How to Pay Offer in Compromise Online
To pay an offer in compromise online, go to the EFTPS website. This stands for Electronic Federal Tax Payment System, and it's a website where business owners and individuals can pay all types of taxes.
To set up your online account, you need your name, address, Social Security Number, phone number, and bank account information. You will enter these details into the EFTPS. Then, the IRS will send you a PIN in the mail. Once you receive your PIN, you can complete your online profile. Then, you can make your offer in compromise payment online. You can make the initial OIC payment as well as the follow-up payments using this online service.
Tips for Paying Offer in Compromise Online
Paying your offer in compromise online is a convenient option. It's especially convenient if you don't use checks or if you want to make sure that your payment doesn't get lost in the mail. Additionally, digital payments are safer than checks which can be stolen in the mail. However, you should keep the following tips in mind if you want to pay your OIC online.
- Make the initial payment on time — Your tax expert can tell you when to make the initial OIC payment online based on when you submit the OIC paperwork.
- Sign up before you need to pay — If you want to make an OIC payment online, sign up a couple of weeks or even a month before you need to make the payment. You can't complete your profile until you receive the PIN from the IRS, and that typically takes about five to seven days.
- Try to pay early — You will lose your OIC and the full tax debt will be due if you miss any of your required payments. Whenever possible, try to pay early. Then, you don't have to worry about connectivity issues or any other problems preventing you from being on time.
- Check the cut-off times — According to the EFTPS website, the IRS says that you must make your payment by 8 pm Eastern Time the day before it's due. For example, if your periodic payment is due on October 15, you should pay by 8 pm ET on October 14th. Otherwise, your payment won't be on time.
Differences Between Lump Sum and Periodic OIC Payments
The main difference between these payments is the timing. With the lump sum, you traditionally made the OIC payment all at the same time, but in recent years, the IRS has decided to give taxpayers up to five months to make the payment. With the periodic payment option, you get to break your offer down into smaller payments and you get to take up to two years to pay the settlement.
How Your OIC Payment Option Affects Your Offer
Beyond that, the way that you choose to structure your OIC payment also affects the total amount you will need to pay. When you apply to settle your tax debt for less than you owe, the IRS takes your future income into account when reviewing your offer. The agency takes 12 months of future earning potential into account if you make a lump sum payment, and it takes 24 months of future earning potential into account for a periodic OIC payment.
Here's a breakdown of how that works. Imagine that your monthly income is $10,000 and your expenses are $8,000. You have $2,000 left every month, and generally, the IRS wants all of this disposable income included in your offer.
If you apply for a lump sum offer, you'll multiply $2,000 by 12, and you'll have to include the $24,000 in your offer. In contrast, if you request a periodic payment offer, you will have to multiply the $2,000 by 24. That's $48,000, and you'll have to include that amount in your offer. Note that this isn't the whole amount of your offer in most cases. You will also need to include the equity in your assets in your offer.
Can You Make OIC Payments Early?
With both OIC payment options, you can pay the offer before the deadline. For instance, imagine that the IRS accepts your offer for a lump sum payment. You don't have to wait 5 months. You can send in the rest of your payment the very day that you receive your acceptance letter. In fact, the sooner you complete your OIC payment, the better. You don't want to risk missing the deadline — if you do, you'll lose your offer.
Similarly, imagine that you're making payments on a 24-month period OIC payment plan. After making payments for a year, you realize you can pay off the rest of the offer right now. That's great. Go ahead and make the early payment. There is no penalty for paying early.
Should You Send the Entire Payment With Your OIC Application?
If you like, you can send the whole OIC payment with your application, but you should be careful about that option. Sending the whole payment won't make the IRS more likely to accept your offer. The IRS looks at the details on your application, and it uses that information to determine your acceptance or denial. Sending the whole payment doesn't help to sway the process in your favor.
Additionally, if you send in the whole amount and you're rejected, you won't get that money back. The IRS will apply it to your tax balance so you will get credit for the payment, but you will still owe the remainder of the tax debt.
Payments for Low-Income Certified Applicants
If you qualify for low-income certification, you don't have to pay the OIC application fee. You also don't have to send the 20% downpayment or the first periodic payment with your application. But you need to make sure that you tick the low-income certification box. In this case, your first payment is due 30 days after the IRS accepts your offer unless your offer has a special provision with a different time frame.
To qualify as low-income, you don't necessarily have to struggle to cover your basic living expense. Your adjusted gross income (AGI) just needs to be under the income threshold set by the IRS for your family size.
As of 2022, you qualify as low income if you're single and earn under $32,300. If you have a family of five, your AGI should be under $77,600 to qualify as low income. These numbers are for taxpayers who live in the continental United States. The thresholds are higher for Alaskans and Hawaiians. The IRS includes a chart on Form 656 that shows you the income limits. Or your tax pro can help you determine if you qualify as low income.
Will the IRS Keep Your Tax Refund and Apply It to Your Offer?
Traditionally, the IRS kept your tax refund when you applied for an offer in compromise. The refund reduced your IRS tax debt, but it didn't count toward your offer. As of November 2021, the IRS has updated its processes.
Tax refunds while offer is pending
While your OIC application is pending, the IRS can keep all of your tax refunds. For example, say that you apply for an OIC on your 2021 tax bill in April 2023. When you file your 2022 tax return, you have a refund, and since your offer is pending, the IRS keeps the refund and applies it to your tax bill.
However, you may be able to get around this rule if you're suffering economic hardship. Typically, in this case, you must convince the IRS how much you need, and the agency will give you that amount from your refund. For example, imagine your refund is $4,000, but your water heater broke down and you need $1200 to replace it. If you qualify for the refund offset bypass, the IRS will send you the $1200. Then, the agency will keep the remaining amount ($2800) and apply it to your tax debt.
Tax refunds after offers accepted
As of November 2021, you get to keep tax refunds from the year that your offer is accepted. For instance, say that you apply for an OIC on back taxes, and the IRS accepts your offer on November 1, 2022. When you file your 2022 tax return, you have a refund. You will get to keep the refund since 2022 was your year of acceptance.
However, if you amend an old return and earn a refund, you generally won't be allowed to keep that. For instance, say that you got an OIC offer accepted on your 2021 taxes in 2022. Then, you notice a mistake on your 2020 taxes so you amend that year's return for a refund. The IRS will apply this refund to your tax debt, but it will not reduce the amount you need to pay on your offer. If the IRS accidentally sends this refund to you, you are supposed to return it within 30 days. Breaking rules like this can jeopardize your offer — that's one of the many reasons why it's best to work with a tax professional.
Initial Payment Rules for Different Types of Offers
The Internal Revenue Service accepts offers in compromise for three different reasons. The OIC initial payment requirements vary based on the compromise program to which you're applying. Here's an overview of the initial payment requirements and links to the different types of compromise programs:
- Doubt as to collectibility — You must make the initial payment as explained throughout this guide unless you meet the low-income certification guidelines.
- Effective tax administration — You should also make the initial payment as explained throughout this guide.
- Doubt as to liability — If you're applying because you don't think you really owe the tax liability, you don't have to include the initial OIC payment or the application fee.
Other OIC Payments
If the IRS accepts your offer to reduce your tax liability, you have to make the OIC payment as explained above. But you have to stay compliant with tax filing requirements and make all your tax payments on time for at least five years after your offer is accepted. If you're required to make any of the following payments, you must stay current on them if you want to keep your offer:
- Required estimated tax payments — These are quarterly payments made by self-employed people.
- Required federal tax deposits — Generally, federal tax despoits refer to payroll deposits made by employers to cover Social Security, Medicare, and income taxes withheld from their employee's paychecks plus the employer's portion of these taxes. Your payment schedule depends on how much wages you pay throughout the year.
- Federal income taxes — If you file a return and owe money, you'll also need to make that payment to keep your offer active.
Don't forget that you also have to pay the $205 application fee (as of 2022) unless you meet low-income certification or unless you're applying for doubt as to liability.
Additional Information About OIC Payments
When you send in your offer in compromise application, you should attach two checks made out to the United States Treasury. One check is for the initial payment, and the other is for the application fee. If you pay online, you'll also have to make two separate payments.
The payments you send with your application are non-refundable. Therefore, if the IRS does not approve your OIC, then the IRS subtracts any payments you made from your total balance. However, if money is tight, you do not want to “waste” those payments. To be on the safe side, make sure you fill out everything correctly and provide as much information as possible. This increases your chance of success.
It is always a good idea to send your payments, IRS forms, and related financial documents via Certified Mail. This way, you know when the IRS received it. Have more questions about OICs? Then, check out the OIC FAQ page.
Get Help With an Offer in Compromise
It’s hard to get an acceptance for an Offer in Compromise. The IRS intentionally makes the process difficult. If you are considering applying for an Offer in Compromise with the IRS, connect with a tax professional by starting a search below. At TaxCure, we have developed a marketplace of tax professionals who focus on resolving tax problems and who have a history of successfully getting OICs approved for their clients.
We realize how hard it is to find a professional to help with tax problems since the average CPA doesn't focus on tax resolution. When you use TaxCure, you can be confident that you're finding tax professional that have experience with an offer in compromise.
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.