IRS Offer in Compromise Qualifications & Eligibility Requirements
There are three main situations where the IRS considers an Offer in Compromise (OIC). These are the basic offer in compromise qualifications. You have to fall into one of these categories to qualify or have one of these reasons to apply. They all have slightly confusing names, but the concepts are pretty clear. Furthermore, there are also other eligibility considerations to take into account.
1. Doubt as to Collectibility
It is when the IRS doubts it will be able to collect the taxes in the future. To determine your collectibility status, the IRS considers the following three questions. If you answer “no” to these questions, your offer has a higher chance of being accepted.
- Would the IRS be able to collect more through forced collections than by accepting your offer? The IRS needs to believe it is getting the best deal possible.
- Is your financial situation going to improve over time? If the IRS believes it could collect the taxes in the next few years, it won’t accept the offer.
- Would other people think the offer was inappropriate?
When you make an offer to the IRS, your offer must be equal to or higher than your Reasonable Collection Potential (RCP). They calculate your RCP using Form 433-A (OIC). Your RCP is equal to net income (monthly disposable income) multiplied by the payment period (12 or 24) plus equity in assets.
2. Doubt as to Liability
It is when the IRS doubts that your tax bill is correct. It can happen if the assessor makes a mistake or if the examiner refuses to accept your documents. It can also come into play if you have new documents proving you owe less tax.
3. Effective Tax Administration
If the IRS believes that paying your taxes would create financial hardship, you may qualify for an OIC under this category. It also applies in situations where paying the taxes owed would be very unfair.
Other Eligibility Requirements for an OIC
To recap, if you fall into one of the above three categories, you may qualify for an Offer in Compromise. However, there are a few additional requirements:
- You cannot currently be going through bankruptcy
- Must have filed all federal tax returns you are required to file
- If a business wants to apply, for the current quarter, it must have made all required federal deposits
- If a sole proprietor or partner owes, he or she must comply with estimated tax payments
- Must pay the OIC application fee, which is $186 dollars unless you qualify as low income. For the IRS to consider a taxpayer low-income, their income must be at or below 250% of the federal poverty level. They prove this by looking at the taxpayer’s most recent tax return. However, the taxpayer can request a waiver based on their current monthly gross income.
- Must submit the required documents. Please see the documents and forms needed here.
The IRS streamlined the OIC program with the Fresh Start Initiative. As a result, in 2012, the IRS changed how it calculates future income. Specifically, Lump Sum offers now only look at one year of future income, and Short-Term Periodic offers now only look at two years of income. Moreover, the IRS will consider state taxes and student loans in calculating monthly living expenses. These changes made the OIC program available to a larger group of taxpayers.
Filing for an Offer In Compromise is time-consuming and confusing, and you should get help from a licensed tax professional. You can also leverage the search box below and once the search results load, use a filter under solutions and select "offer in compromise" to find tax pros with offer in compromise experience.
Disclaimer: Not legal or tax advice. This article should not be used as a substitute for the advice of a competent attorney or tax professional admitted or authorized to practice in your jurisdiction.