What is an Offer in Compromise?
An offer in compromise (OIC) is an agreement between a taxpayer and the Internal Revenue Service that settles the taxpayer's tax liabilities for less than the full amount owed. Taxpayers who can fully pay the liabilities through an installment agreement or other means, will not qualify for an OIC in most cases.
Do I Qualify for an Offer in Compromise?
The Offer in Compromise (OIC) program is an Internal Revenue Service program authorized by 26 U.S.C. Section 7122 which allows qualified individuals with
The Offer in Compromise (or OIC) program, in the United States, is an Internal Revenue Service (IRS) program under 26 U.S.C. § 7122 which allows qualified individuals with an unpaid tax debt to negotiate a settled amount that is less than the total owed to clear the debt. A taxpayer uses the checklist in the Form 656, Offer in Compromise, package to determine if the taxpayer is eligible for the offer in compromise program. The objective of the OIC program is to accept a compromise when acceptance is in the best interests of both the taxpayer and the government and promotes voluntary compliance with all future payment and filing requirements.
Do I Qualify for an Offer in Compromise?
At least one of three conditions must be met to qualify a taxpayer for consideration of an OIC settlement:
- Doubt as to Liability — Debtor can show reason for doubt that the assessed tax liability is correct
- Doubt as to Collectibility — Debtor can show that the debt is likely uncollectable in full by the IRS under any circumstances
- Effective Tax Administration — Debtor does not contest liability or collectibility but can demonstrate extenuating or special circumstances that the collection of the debt would "create an economic hardship or would be unfair and inequitable." This Offer in Compromise program is available for any taxpayer, but is primarily used by individuals that are elderly, disabled, or have special extenuating circumstances.
Can I really pay only Pennies on the Dollar for my Back Taxes?
The IRS has made it easier than ever to qualify for a settlement of your back taxes, and some settlements end up being pennies on the dollar. But be careful of ads on TV that sound to good to be true. Many of the companies that make these sorts of claims operate out of state and charge extremely high fees. There are many examples of people paying these fees only to later learn they never qualified for an offer in compromise. Always check a firm's Better Business Ratings, and online reviews before proceeding. It is almost always better to work with a local firm that has been in business for years. Morrison + Murff was established in 2004 and has helped thousands of Utahans out of difficult financial problems.
Does an Offer in Compromise affect a Lien or Levy?
An Offer in Compromise will have no effect upon a tax lien. The lien will remain in effect until the offer is accepted by the IRS and the full amount of the offer has been paid in full. Once the offered amount has been paid, the taxpayer should request that the IRS remove the lien.
An offer in compromise will stop tax levies under section 301.7122(g)(1) of the US Federal Tax Regulations. That regulation states that the IRS will not levy upon a taxpayer's property while a valid offer in compromise (an offer that has been accepted for processing) is pending and, if rejected, for thirty days after the rejection. If the taxpayer appeals the rejection, the IRS cannot levy while the appeals process is ongoing. If a levy is in place when the offer is submitted, it is not automatically released.
How Much Does an Offer in Compromise Cost?
Attorneys Fees for an OIC can vary depending on how much you owe and your personal financial situation. When you submit your OIC, the IRS requires that you pay an up front 20% of your offer. For example, if you owe $50,000 in back taxes and you offer to pay $5,000, you would need to send in $1000 (20%) with your offer. If the IRS declines your offer, the IRS will apply the $1000 to your back taxes. There is also a $186 fee which must be submitted along with your Offer in Compromise.
An Offer submitted without the required fees is subject to rejections without appeal. After the IRS receives the Offer, the IRS has two years to make a decision. If the decision is not reached by that time, then the Offer is automatically accepted.
Under the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA 2005) if a taxpayer chooses to make payments over time, i.e. monthly, the taxpayer must include with the offer the first month's payment. The taxpayer is not required to submit the 20%, which applies only to the lump sum payment option. Then during the time that the offer is being considered by the IRS, the taxpayer must keep making the monthly payments to keep the offer current. If the taxpayer fails to make the payments, the offer will be returned to the taxpayer.
In the case of both the $150 application fee and either the 20% down payment or the monthly payments, a low income taxpayer may be exempt from both. The taxpayer should review the Form 656A to determine whether these fees and payments apply to them.
What is a tax settlement?
A tax settlement is an arrangement which is acceptable to the IRS or state taxing authorities that allows a taxpayer to retire an outstanding tax debt for less than the original amount owed.
How Long Does an Offer in Compromise Take?
A typical offer in compromise candidate waits 6-12 months just for the IRS to process the request. There is currently a backlog of request and some OIC's will take more than 12 months. During the OIC review process, the IRS will not collect on you, file liens or levies, or garnishments.