One of the very few exceptions to the uncertainty of life is taxes. It’s a reality we all face and it’s only right that we set aside funds to be financially ready to pay our taxes. But sometimes, life throws us curveballs such as medical emergencies, accidents, or natural disasters that can really distress our finances and make us unable to meet our tax obligations.
Fortunately, the Internal Revenue Service (IRS) understands that unexpected events and challenges can happen to anyone. Hence, the IRS provides lifeline to eligible taxpayers who are facing financial difficulties; the IRS Offer in Compromise. It has a strict set of requirements but it can really give someone a breather if they qualify.
What is the IRS Offer in Compromise?
The Offer in Compromise (OIC) is an IRS program that allows eligible taxpayers to settle their tax obligation for less than what they owe. The IRS will accept the reduced payment offer as full payment for their debt if the taxpayer can prove that they are having financial hardship or will face financial hardship if they pay their tax obligation in full.
The IRS will assess the taxpayer’s ability to pay, income, expenses, and net assets. In general, the IRS accepts a payment offer if it is the most the IRS can expect from the taxpayer.
Who May Apply?
The Offer in Compromise program is not for everyone. Even if you can prove that you are or will undergo financial hardship if you pay your tax liability in full, you still can only apply for an OIC if you:
- filed all the required tax returns and made all the required estimated payments
- have received a bill for at least one tax debt included in your offer
- are not in an open bankruptcy proceeding
- have a valid extension for a current year return (if applying for the current year)
- are self-employed and have employees: must have submitted all the required federal taxes for the current quarter and the two preceding quarters .
- must resolve any open audit or outstanding innocent spouse claim issues
- must not have a deactivated ITIN (Individual Tax Identification Number)
Furthermore, the IRS will not accept your offer if they find that you can pay your taxes in full through an IRS installment agreement or equity in assets.
Payment Options
The Offer in Compromise has two payment options. The amount of the initial and succeeding payments will depend on the amount you offer and the payment option that you choose.
Lump Sum. Under this option, your initial payment is 20% of the amount you offer. The remaining balance must then be paid in a maximum of 5 installments within 5 or fewer months from the date your offer is accepted.
Periodic Payment. Under this option, you may propose to pay your offer within 6 to 24 months with the first periodic payment as your initial payment. The taxpayer must not miss a periodic payment while the IRS is evaluating your offer, otherwise the IRS may return your offer.
How to Apply?
To apply for an offer in compromise, the taxpayer must submit the following:
- Form 656: Offer in Compromise
- Completed and signed Collection and Information statement form:
- Form 433-A (OIC) – for wage earners and self-employed individuals, if applicable
- Form 433-B (OIC) – for businesses, if applicable
- Non-refundable application fee of $205*
- Your initial offer payment based on your preferred payment option*
*Not required in the application if you meet the low-income certification guidelines.
Submitting an application for an OIC does not guaranty that the IRS will accept your offer. There are lots of considerations and requirements to meet. Still, the OIC serves as a great lifeline to those who are facing financial difficulties.
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