Dealing with the IRS can feel overwhelming, especially when you owe more than you can afford to pay. One option that might provide relief is an Offer in Compromise (OIC). But does an offer in compromise work? Understanding how this program works, who qualifies, and how to apply can help you decide if it’s the right solution.
What Is an Offer in Compromise?
An Offer in Compromise is a tax debt resolution option that allows you to settle your tax liability for less than the full amount owed. It is a formal agreement between you and the IRS. The IRS agrees to accept a reduced amount as full payment of your tax debt. This program is designed to give taxpayers unable to pay their full tax debt a chance to settle their obligations.
However, it’s not a free pass. The IRS only accepts an offer if it believes it represents the most it can expect to collect within a reasonable period.
Does an Offer in Compromise Work?
So, does an offer in compromise work? The effectiveness of an Offer in Compromise depends on your specific situation. It works well for individuals who genuinely cannot pay their full tax debt and have no other reasonable means to settle the amount.
The IRS carefully reviews each application to determine if the offer reflects the maximum amount they can collect within a reasonable time. If your financial situation shows that you can’t pay the full amount, an OIC might work for you.
Essential Criteria for Qualifying for Offer in Compromise
Not everyone qualifies for an Offer in Compromise. The IRS has strict guidelines to determine eligibility. Here are some key criteria:
Inability to Pay
You must demonstrate that you are unable to pay your tax debt in full through lump sum or installment payments. This means you have no assets or income that could cover the debt.
Reasonable Collection Potential (RCP)
The IRS calculates your RCP based on your income, assets, and living expenses. If your offer is at least equal to or greater than your RCP, you may qualify.
Compliance With Tax Obligations
You must be current with all filing and payment requirements to be eligible. This includes filing all required tax returns and making all required estimated payments for the current year.
No Open Bankruptcy Proceedings
You cannot have an open bankruptcy case when you apply for an Offer in Compromise.
The Offer in Compromise Process
The process of applying for an Offer in Compromise involves several steps. To increase your chances of approval, follow these steps carefully:
Step 1: Pre-Qualify Yourself
Before you apply, you should use the IRS’s Offer in Compromise Pre-Qualifier tool. This tool helps you determine if you meet the basic eligibility requirements. It’s a quick way to see if an OIC might be an option for you.
Step 2: Gather Your Financial Information
You will need to provide detailed information about your income, expenses, assets, and liabilities. The IRS will review this information to calculate your RCP. Make sure you have all necessary documents ready, such as pay stubs, bank statements, and tax returns.
Step 3: Submit Your Application
To apply, you must complete the following application forms: Form 656, Offer in Compromise, and Form 433-A (OIC) for individuals or Form 433-B (OIC) for businesses. You’ll also need to include an application fee of $205 and an initial payment. The amount of the initial payment depends on the payment option you choose.
Send the mentioned information to the appropriate address provided on Form 656-B. You are required to submit your application package to either of the two specified locations.
Step 4: Review and Decision by the IRS
Once the IRS receives your application, they will review your financial information and calculate your RCP. If they believe your offer represents the most they can collect within a reasonable time, they will accept it. If not, they may reject your offer or suggest a higher amount.
How and When an Offer in Compromise Works for Individuals
Does an offer in compromise work? Yes, but it can only work effectively if you meet specific conditions. How can you tell if an Offer in Compromise is right for you? Here are some scenarios where an OIC might be the right solution:
Low Income and Assets
If you have a low income and few or no assets, your RCP will be low. This increases the likelihood that the IRS will accept your offer.
No Viable Payment Options
If you’ve explored other payment options, like an installment agreement, but still can’t afford to pay, an OIC might be your best bet.
Significant Financial Hardship
If paying your tax debt would cause you significant financial hardship, the IRS may consider your offer more favorably. Financial hardship could mean you are unable to meet basic living expenses or provide for your dependents.
Long-Term Inability to Pay
If your financial situation is unlikely to improve in the foreseeable future, the IRS might accept your offer. This situation often applies to individuals with long-term disabilities, chronic illness, or retirement with limited income.
When an Offer in Compromise Might Not Work
An Offer in Compromise is not for everyone. Here are some situations where an OIC might not be the best option:
Ability to Pay
If you have the financial ability to pay your tax debt in full, the IRS will likely reject your offer. The IRS expects you to explore other payment options before considering an OIC.
High RCP
If your RCP is higher than the amount you offer, the IRS will reject your offer. You may need to reconsider your offer or look into other payment plans.
Non-Compliance With Tax Obligations
If you are not current with your tax filings or payments, you will not qualify for an OIC. The IRS requires that you be fully compliant before they will consider your offer.
Pros and Cons of an Offer in Compromise
Like any debt resolution option, an Offer in Compromise has its advantages and disadvantages. Weigh these before deciding on whether an Offer in Compromise is right for you.
Advantages of an OIC
An Offer in Compromise (OIC) can reduce your tax debt by thousands of dollars, providing significant debt relief. When the IRS accepts your offer and you complete your obligations, your tax debt is resolved. This gives you a fresh start and a clean slate for your financial situation.
Settling your tax debt through an OIC also helps you avoid potential legal actions such as wage garnishments, bank levies, or property liens, protecting you from further financial burdens.
Disadvantages of an OIC
Qualifying for an OIC can be challenging. The OIC process can be time-consuming, taking several months to complete. Unfortunately, during this time, interest and penalties on your tax debt may continue to accumulate.
Although the acceptance of an OIC itself does not have a direct impact on your credit score, the tax debt leading up to the OIC may have already affected your credit score negatively.
How to Improve Your Chances of Success
To improve your chances of having your Offer in Compromise accepted, follow these tips:
Ensure Compliance
Make sure all your tax filings and payments are up to date. The IRS will not consider your offer if you are not compliant with your tax obligations.
Provide Accurate Information
Double-check all the information you provide in your application. Any errors or omissions could lead to rejection.
Offer a Realistic Amount
Your offer should reflect your true ability to pay. If the amount you offer is too low, the IRS will likely reject it.
Seek Professional Help
Consider hiring a qualified tax professional, such as Creative Tax Solutions, to assist you with the OIC process. A professional can help ensure that your application is complete and accurate, improving your chances of acceptance.
What Happens If Your Offer in Compromise Is Rejected?
If the IRS rejects your Offer in Compromise, don’t panic. You have options. The IRS may provide reasons for the rejection and suggest a different payment plan. You can also appeal the decision if you believe the IRS made an error in evaluating your offer. To appeal, you must file Form 13711, Request for Appeal of Offer in Compromise, within 30 days of the rejection.
Let Tax Professionals Help You
So, does an offer in compromise work? The answer is yes, but only for the right individuals. It works if you genuinely cannot pay your tax debt, have no other payment options, and meet the IRS’s strict criteria.
The process is not easy, and it requires careful preparation and consideration. But if you qualify, an OIC can provide significant relief from overwhelming tax debt.
If you’re struggling with tax debt and considering an Offer in Compromise, Creative Tax Solutions is here to help. Our mission is to provide the highest quality accounting, tax, and advisory services to help you take control of your debt and finances.
Let us guide you through the OIC process and explore all available options to achieve the best outcome. Contact us today or call (877) 707-5151 to schedule a free consultation and take the first step toward financial freedom.
