Posted by Thomas G Kinsella, ATP

Five Important Things to Know About the IRS Offer in Compromise (OIC)

Five Important Things to Know About the IRS Offer in Compromise (OIC)

You must have come across an advert asking you to settle your tax debt penny for dollar. Typically, this is the IRS offer in Compromise – a program from Uncle Sam to help people pay very little out of their tax debt. 

Statistically, the probability of qualifying for an OIC program is low, and records have it that 67% of all OIC applications were rejected. This is not to mark an OIC as an impossible feat, but this article will explore essential things to know about the program. 

  1. How do you apply for IRS OIC?

There are three parts of the application for an IRS Offer in Compromise:

  1. IRS Forms 656 and 433A that has been completed. For people that believe the tax debt was in error, Form 656L is the right form

  2. An application fee of $205 is non-refundable and might be waived if the person meets the low-income threshold

  3. The first payment towards the due of your new balance

Uncle Sam will request a series of information on your assets, income, debt, groceries, utilities, and other expenses on applying for an Offer in Compromise. It is a good idea to work with a tax professional to help with the paperwork.

  1. Who Qualifies for the Offer in Compromise?

To benefit from the IRS Offer in Compromise program, you need to qualify for the application and also get Uncle Sam to accept the offer. 

As long as any of the following is true, Uncle Sam will reject an application:

  1. Your application is missing necessary information

  2. You are not current with the filing of your returns

  3. There is no bill for one of the tax debt in your offer

  4. You still have tax debt for the current year

  5. There is an ongoing bankruptcy proceeding involving you

  6. You neither filed your return nor paid your tax because you were awaiting a response

  7. Your case was transferred to the Department of Justice by Uncle Sam

  8. The tax debt was ordered by the court

  9. You did not include the application fee

Rejection of the application does not mean you cannot apply again; you simply need to fix the issue and reapply. 

  1. How Uncle Sam Decides Approval for OIC

Basically, Uncle Sam uses your financial information to estimate your reasonable collection potential (RCP) – This is what the IRS thinks you can give them now and in the future. The IRS will examine your vehicles, assets, bank accounts, current income, basic living expenses, properties, future income, your residence, the age of your cars in estimating the RCP. 

Uncle Sam will likely reject your OIC, except what you offer is the same or greater than the RCP. Besides the calculation aspect, there are three reasons your OIC will be granted.

  1. You have a genuine legal case on the validity of your tax debt and the specific amount.

  2. If you paid the taxes in full, your life would be miserable 

  3. Uncle Sam does not believe you can pay the amount. 

  1. What you will Pay

Uncle Sam's offer in Compromise has two options for paying the new and revised tax bill:

  1. Lump-Sum

  • You pay in five months

  • Your application needs to have 20% of the offer amount alongside the application fee. Sadly, this is a non-refundable payment that you will not get back if Uncle Sam rejects the payment. 

  1. Payment Plan

  • Pay in 24 months

  • The first payment needs to be sent with your application alongside the application fee. 

  1. Other Important Things to Know about IOC

While the process might appear complicated, there are essential things to know:

  • There is a non-refundable application fee.

  • You need to make the first initial payment (20% of what you propose to pay) which is also nonrefundable.

  • Filing your application puts a pause to all collection activities from Uncle Sam – no more liens or levies until they accept your offer

  • Your refunds can be kept and applied to the debt.

  • If Uncle Sam rejects your offer, one can appeal within 30 days. There is online self-help that can take you through the process. 



Thomas G Kinsella, ATP
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