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Posted by Jim McClaflin, EA, NTPI Fellow, CTRC

How To Request an Offer in Compromise

How To Request an Offer in Compromise

An OIC (Offer in Compromise) is a payment option that the IRS makes available to taxpayers. It enables you to pay off your tax debt without "going bankrupt" or "breaking the bank."

In other words, you can pay off your debts comfortably without losing your home, business, or any other asset you need for your daily survival. We hope that knowing this will ease your anxiety a bit.

Applying for an OIC (offer in compromise) is not an easy process, but it is worth it if you want to reduce your tax debt.

A taxpayer must follow very specific rules to be eligible for an offer in compromise, outlined in this chapter.

We'll also go over the process in more detail to see the different steps and what the IRS is looking for at each step, even after you receive your offer.

Like all creditors, the government has to deal with the debtor's inability to pay. They must also decide how to adjust the score when reasonable minds may differ from the amount owed. Businesses resolve their credit issues with a standard process of negotiation and engagement.

The government also recognizes the usefulness of this process; thus, it promotes a fair and efficient outcome for the IRS and the taxpayer. As a result, the government authorized the IRS to negotiate and regulate taxpayer liability through the Offer in Compromise program.

If you're thinking of an offer in compromise, it won't hurt to consult a reputable lawyer who has worked with clients over the years to bring their OIC applications together and have a good history of success. 

OIC: The process of making an offer

In most cases, the IRS will offer to offer a non-payment option to a taxpayer when:

  • Analysis of the taxpayer's income, assets, liabilities, and expenditure show that payment of the full tax payable is unlikely (this second factor does not apply to doubts as to liability cases).

  • There is no criminal procedure.

Once the IRS establishes these two things, the IRS will bring the offer of an option in compromise to the taxpayer's attention. The representative of the IRS will discuss the benefits of an accepted offer and the forms to fill out. The IRS requires its employees to provide the taxpayer with:

  • Form 656 (Offer in Compromise)

  • Publications 1 and 594

You can also find additional instructions for Form 656 on Form 656-B, also known as an OIC (offer in compromise) booklet.

Other important information to consider when considering an offer in compromise is as follows:

  • All credits and refunds available to the taxpayer are canceled before or during the year of acceptance of the offer.

  • Taxes cannot be reduced, nor tax guarantees issued until full payment of the amount offered.

  • The taxpayer must comply with reporting and payment requirements for five years after Uncle Sam accepts the offer or until the figure offered is paid, whichever is greater.

The Internal Revenue Agency will not inform the taxpayer of the amount that may be offered; it is up to the affected taxpayer to initiate the first proposal. That being said, the IRS advises taxpayers that the offer must be made in good faith.

Also, the IRS discourages the taxpayer from using the offer as a late payment tactic.

As proof of good faith, the taxpayer can submit any payment amount with the completed Form 656. Once it is received, the IRS will treat this amount as a deposit.

This amount will only apply to liability after acceptance of the offer; unless the taxpayer authorizes in writing to request payment, regardless of acceptance of the offer.

Offer Terms and Partial Payment Requirement

A taxpayer may be qualified to offer one of the following payment options:

  • Payment in a lump sum

  • Payment in installments 

While the IRS is reviewing the offer, the taxpayer must make partial payments in accordance with IRS Regulation §7122(c). The amount of the deposit required depends on the type of offers offered by the taxpayer.

For the purpose of a compromised offer, a lump sum cash offer includes lump sum payments as well as amounts paid in five installments or less over a period of five months. If the taxpayer chooses to make a lump sum offer, 20% of the offer must be submitted with the request.

Alternatively, the taxpayer can choose an offer in several installments. This is also known as a recurring payment offer. A payment plan refers to all offers in which the payment plan exceeds five monthly payments. However, all installment offers accepted by the IRS must be reimbursed within 24 months of acceptance of the offer.

If the taxpayer opts for an offer in several installments, the first installment must be sent with the offer.

The taxpayer must respect the terms of the payment plan that he imposed upon himself during the examination of the offer. Otherwise, Uncle Sam will treat the offer as a withdrawal. 

In all cases, the advance payment will apply to the offer if accepted but not refunded if the offer is rejected. Failure to meet the above requirements for any of the options will result in the determination that the offer cannot be processed. The offer will then be returned to the taxpayer, and the IRS can take immediate enforcement action. 

Some taxpayers may not be required to make a deposit. These people include:

  • Low-income taxpayers

  • Taxpayers who have submitted offers based on liability issues.

Low-income people are totally exempt from the obligation to pay in part. For the purpose of the Offer in Compromise, a low-income taxpayer is someone whose adjusted gross income is less than 250% of the applicable poverty line. 

For taxpayers who submitted an offer based on liability concerns, the partial payment obligation is only available to those who submitted it only for that reason. These are optional exemptions that are at the discretion of the IRS. 

Offers in Compromise Before Bankruptcy

This section applies only to those who are considering filing for bankruptcy. Suppose the taxpayer states that it will file for bankruptcy during the investigation of the offer. In that case, the IRS must determine the likelihood of it filing for bankruptcy and what impact the potential filing would have on its ability to collect.

To decide whether the offer is reasonable, the IRS will consider whether the taxpayer has ever been involved in bankruptcy proceedings or whether a tax liability can be paid. Unless there are special circumstances, the IRS will not accept less than the amount it proposes to recover from a Chapter 7 bankruptcy.



Jim McClaflin, EA, NTPI Fellow, CTRC
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