At times, paying your tax debt becomes impossible. However, there is a solution to cease the collection calls from the IRS. The organization has various programs aimed at assisting taxpayers in paying their taxes in arrears.
The IRS occasionally offers taxpayers the opportunity to settle their tax bill for an amount lower than the total owed, referred to as an Offer in Compromise (OIC).
A tax lawyer can guide you in determining if an OIC is suitable for you. If it is, the lawyer will negotiate with the IRS on your behalf to settle your tax bill for the lowest amount possible. If not, the lawyer will find the optimal resolution for your tax situation. To help you further, we have provided a brief on the requirements and timeline for an OIC.
What Is an Offer in Compromise (OIC)?
An Offer in Compromise (OIC) is a program offered by the Internal Revenue Service (IRS) that allows taxpayers to settle their tax bill for an amount that is less than the full amount of back taxes owed. It is a way for taxpayers who cannot pay their tax debt in full to negotiate with the IRS and agree on a lower amount they can pay. An OIC is typically used as a last resort option for taxpayers facing financial hardship who cannot pay their tax debt in full. The IRS will consider several factors, including the taxpayer's ability to pay, income, expenses, and assets, when determining if an OIC is an appropriate solution.
Am I eligible for an Offer-In-Compromise?
The eligibility criteria for an IRS Offer In Compromise (OIC) can be complex, which is why it's recommended to consult with a tax professional to assess your eligibility. Here are some general prerequisites for the IRS OIC program:
You must demonstrate that you are unable to pay the full tax bill.
You must have filed all necessary tax returns.
You must have made all required quarterly tax payments for the year in question.
You must have received a notice for at least one of the tax debts you are proposing to settle through an OIC.
You must not be in the midst of an active bankruptcy proceeding.
How to Apply for an OIC
To apply for an Offer-in-Compromise with the IRS, you will need to follow these steps:
Gather financial information: Before you apply, you need to gather your financial information, including your income, expenses, assets, and liabilities.
Determine your eligibility: Check the eligibility requirements for an Offer in Compromise to make sure you qualify.
Complete Form 656: Download and complete Form 656, Offer in Compromise, and attach a detailed explanation of your financial situation, including a list of your debts and assets.
Pay the non-refundable application fee: Submit a $205 application fee or a $274 fee for those who wish to pay in installments.
Submit the required documentation: Include supporting documentation such as bank statements, pay stubs, and bills to support your financial information.
Wait for a response: The IRS will review your application and determine whether to approve or reject your Offer in Compromise.
Comply with the terms of the agreement: If your Offer in Compromise is approved, you must comply with the terms of the agreement, including making timely payments and filing all necessary tax returns.
It's important to seek professional help from a tax attorney or a tax professional to increase your chances of getting your Offer in Compromise approved.
What happens if the IRS accepts your OIC?
If the IRS accepts your OIC, here's what to expect:
Request for Additional Information: The IRS may ask for more information while reviewing your offer to settle your tax debt. Ensure you respond to these requests promptly, or the offer will be rejected, and you won't be able to appeal.
Approval Notification: If your Offer in Compromise is approved, the IRS will send a written notification. You will be able to pay off your taxes for a reduced amount.
Lump-sum and Periodic Payments: With a lump-sum offer, you have 5 months to make the payment. With regular payment offers, you make monthly payments for between six and 24 months.
Refunds: The IRS will keep any tax refunds you earn for the year the offer was accepted. For example, if your offer was accepted in 2022, the IRS can keep your 2022 tax refund. This amount doesn't reduce the amount you have to pay for your Offer in Compromise.
Compliance: For the next five years, you are required to stay compliant with tax filing and payment obligations. Failure to do so may result in the IRS rescinding your offer and demanding payment for the full tax liability.
What happens if the IRS rejects your OIC?
If the IRS rejects your OIC, here is what will occur:
First, the IRS will send you a written notification indicating that your offer has been declined. The down payment that you made will be retained by the IRS and applied toward your tax bill, leaving you with the outstanding balance still owed.
You must act promptly in this scenario and seek guidance from our tax attorneys to find the best solution for your specific case.
Should you disagree with the IRS' rejection, you have the right to file an appeal within 30 days of receiving the rejection letter. Again, our tax attorneys can assist you in navigating this process.
Types of Offers in Compromise & Requirements
There are two main types of Offers in Compromise (OIC):
Doubt as to Collectibility: This type of offer is made when you cannot afford to pay the full amount of taxes owed. The IRS will consider your assets, income, and expenses to determine if the amount owed can be collected from you.
Requirements: You must file all required tax returns, provide financial information, and make full payment or begin a payment plan for any taxes owed for the current year.
Doubt as to Liability: This type of offer is made when you dispute the amount of tax owed. The IRS will review the facts and circumstances of the case to determine if the liability is correct.
Requirements: You must provide evidence to support your claim and provide documentation to prove that the liability is incorrect.
Regardless of the type of OIC, it is important to understand that the IRS will only accept an offer if it believes that the amount offered represents the most that can be collected from you within a reasonable time frame. Therefore, before making an offer, it is recommended to seek the assistance of a tax professional to ensure that you meet the requirements and have the best chance of having your offer accepted.
Can You Get an Offer-in-Compromise on State Taxes?
Yes, you can get an Offer in Compromise (OIC) on state taxes. Each state has its rules and requirements for OICs, but the general process is similar to federal taxes.
You will need to provide financial information and demonstrate that you cannot pay the full amount of taxes owed. The state will then review the information and determine if an OIC is viable.
It is important to note that some states do not have an OIC program, while others have strict eligibility requirements. Therefore, it is recommended to consult with a tax professional or reach out to the state tax agency for more information and guidance on the OIC process for state taxes.
Conclusion on OIC
In conclusion, an Offer in Compromise (OIC) is a program offered by the Internal Revenue Service (IRS) and some state tax agencies that allows taxpayers to settle their tax debt for less than the full amount owed. There are two main types of OICs, Doubt as to Collectibility and Doubt as to Liability, and each has specific requirements that must be met in order for the offer to be considered.
While an OIC can provide relief to taxpayers who are struggling to pay their taxes, it is important to understand that not all offers will be accepted. The IRS and state tax agencies will consider factors such as income, expenses, assets, and the taxpayer's ability to pay before deciding if an OIC is a viable option.
If you are considering an OIC, it is recommended to seek the assistance of a tax professional who can help you understand the requirements, prepare and submit the offer, and represent you in the event of a rejection or appeal. With the right guidance, an OIC can provide a solution for resolving your tax debt and getting you back on track with the IRS and state tax agencies.
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