If you have outstanding tax debt with the IRS, you probably want to resolve it as quickly as you can. One option worth considering is an offer in compromise (OIC), where the IRS agrees to let you settle an existing tax debt for less than you owe.
However, it’s critical to understand the timeline of the OIC process before you begin. Missing any deadlines can result in your offer being denied, and because it can take a fair amount of time, you should first determine whether it’s something you can realistically do.
On average, the offer in compromise process takes between 6 and 12 months, but working with a tax attorney can potentially make the OIC process faster and more straightforward. Your attorney can guide you through each step, ensure you don’t miss critical deadlines, and directly communicate with the IRS on your behalf.
Don’t wait in the dark, as timing can make or break your tax relief. At Victory Tax Lawyers, we have saved our clients $91 million and counting in tax debt. As the nation’s leading tax law firm, we’re committed to finding customized tax relief solutions for each of our clients. Ready to stop guessing and start acting? Get a free attorney consultation today and fast-track your results.
This post will take a look at what an offer in compromise entails, how to find out whether you qualify for one, and how to apply. It also will examine the timeline and identify factors that can expedite or delay the process.
What Is an Offer in Compromise?
An offer in compromise (OIC) is essentially a debt settlement agreement with the IRS. If you apply and are approved, you can finalize your tax debt by paying less than the amount you owe. However, the IRS generally only approves your offer if one of the following applies:
- You cannot reasonably pay your full tax liability
- Paying your full tax bill would create economic hardship
- You have a legitimate doubt that you owe what the IRS says you do
The process of applying for an OIC can be lengthy and complex. However, if you feel trapped by back taxes, an offer in compromise has the potential to change your situation for the better.
How to Qualify for an Offer in Compromise
Not everyone is eligible to apply for an offer in compromise. In addition to meeting the requirements above (you either have a legitimate doubt as to your tax liability, cannot reasonably pay it, or cannot pay it without creating a financial hardship), you also must meet the following basic criteria:
- You have filed all required tax returns
- You have made all required estimated payments (for self-employed individuals)
- You are not in an open bankruptcy proceeding
The IRS has an online offer in compromise pre-qualifier tool to help guide your decision. However, even if the tool says you aren’t eligible, you may still be able to make a successful OIC.
When you file, the IRS will examine your financial information and calculate your reasonable collection potential (RCP), which is how much of your debt the IRS could reasonably expect to collect from you. During this calculation, the IRS will take the following into account:
- Your income and expenses
- Your assets
- Your future earning potential
- Your other financial obligations (like mortgages, student loans, and child support payments)
The IRS will then use your RCP to decide whether to accept your offer in compromise. If your offer is less than your reasonable collection potential, the IRS may send you a counteroffer or reject your offer altogether.
How Long Does an Offer in Compromise Take?
Generally, the OIC process takes between 6 and 12 months. Your application will go through several stages.
- Initial Review
Once you send your OIC application and provide supporting documentation, it usually takes the IRS 2-4 weeks for the initial review. During this time, they also will verify that you have filed prior tax returns and made the required estimated tax payments.
- Additional Info Requests
If needed, the IRS may ask for more information, including bank statements, proof of income, and proof of expenses. Once you have sent additional documentation, reviewing it will usually take 4-6 weeks.
- Detailed Review
Once the IRS has all it needs, it will take 6-12 months to conduct a detailed review of your reasonable collection potential. This includes assessing your existing tax liabilities, estimating your future income, and issuing a decision.
It’s worth noting that the timeline for an offer in compromise is longer than that of many other solutions. For example, an installment agreement creates a monthly payment plan, and your request will typically be approved or denied within 30 days.
Another option is penalty abatement, where you request relief from a penalty because outside circumstances made it impossible for you to pay or otherwise comply with IRS requirements. This can often be resolved over the course of a phone call.
Alternatively, you might request that your account be marked as currently not collectible (CNC) because of a current inability to pay. The CNC approval process can take several months, but it’s generally faster than an OIC.
Factors Impacting the OIC Timeline
Even though the typical OIC process is only up to a year, many factors can extend (and sometimes shorten) that time.
- Complexity of the Case: When you apply for an offer in compromise, you must provide reasonable documentation of your financial situation, and the IRS must review it. Special circumstances and complex situations take longer to review.
- IRS Backlog: The IRS handles an overwhelming amount of paperwork. Depending on when you apply for the offer in compromise program, it may take several months for an agent to even get to review it.
- Quality of Submission: Even tiny errors might result in a rejection or request for more information. The more thorough and accurate you are, the faster you’re likely to see a response.
- Taxpayer Response Time: You can’t control how quickly the IRS responds to you, but you can control how quickly you respond to them. Always reply or send requested information as soon as you can.
- Payment Plan Options: How you choose to pay makes a difference when it comes to the timeline. There are two payment plans. If you choose a lump sum payment, you must send 20% of your proposed amount with your application and the rest in five or fewer payments after acceptance.Regarding payment plans, if you want more time to pay, you can choose the periodic payment option. This is when you pay each month for a set period of time (usually up to 24 months).
What Can Delay the OIC Approval Process?
While not all potential delays are within your control, understanding factors that can impact the timeline can give you a better idea of what to expect. With that in mind, these issues can potentially harm your chances of fast approval.
Incomplete Application
Forgetting a document or leaving out critical information can prolong the process for months. This is because the IRS will have to contact you and ask for more information. After you send it in, there’s no guarantee that they will resume the review immediately.
IRS Backlogs
If the IRS is dealing with high case volumes, it may take them a significant amount of time to even review your application. While you can generally expect the IRS to be dealing with some level of backlog, it’s impossible to know just how long it will be when you submit your application.
Complex Financial Situations
When evaluating your application, the IRS must get a clear picture of your finances. The more complex your overall situation is, the longer it takes for them to investigate. Since the IRS has to evaluate your reasonable collection potential before approving or denying your offer, the process may take longer if you have multiple high-value assets that they have to calculate.
Tax Liens
If you already have a tax lien filed against your assets, you may still qualify for an OIC. However, it may complicate negotiations. Tax liens are difficult to remove once they’re in place, and the IRS may take additional time to formally remove a lien even after your offer is accepted.
Inadequate Communication
It’s easy to get a communication from the IRS and say you’ll get to it tomorrow. However, the longer it takes you to respond to the IRS, the longer the OIC process will take. Making an effort to respond to any IRS communication immediately can make a major difference in your case timeline.
5 Steps to Apply for an Offer in Compromise
An OIC can be a great choice if you can’t pay your full tax debt, but the application process is complex, requiring extensive documentation.
When you work with a tax professional, you’ll have an advocate who is familiar with all required deadlines and documentation. If you think an OIC is right for you, contact us to set up your free consultation!
- Pre-Qualification
Before going any further, use the IRS pre-qualifier tool to see if you’re likely to be approved. This tool will ask you basic screening questions (including whether you have filed all required returns and made estimated tax payments) and ask for information on your income, assets, and expenses. It then calculates a quick estimate of your RCP and uses it to determine whether your proposal is reasonable.
- Gathering Documentation
You will need documentation of your income, debts, basic living expenses, and more. Because you won’t have to take time to locate new documents while preparing your OIC, having everything assembled ahead of time will speed up the process.
- Submitting Form 656
Form 656 is a form that allows you to better calculate the minimum amount you need to offer in order to be approved. It also outlines the terms of your OIC agreement with the IRS.
The form will ask you for extensive information, including:
- Basic personal information
- Employment information
- Your personal assets and their values
- Your monthly income and expenses
You also will need to attach documentation such as bank statements, pay stubs (or other documentation of earnings), and statements for investment or retirement accounts. Once the form has been completed and all documentation attached, you must mail it to the IRS.
- Paying the Application Fee
You will need to include a $205 application fee unless you meet the IRS low-income certification guidelines.
- Decision and Negotiations
Once the IRS evaluates your application, they will either accept it, reject it, or counteroffer. With a counteroffer, the IRS agrees to let you settle, but they ask you to pay more than your original offer. If you wish, you can negotiate further, but this may cause the process to take longer.
What Happens After the OIC Is Accepted or Rejected?
Waiting to hear back from the IRS after applying for an offer in compromise can be nerve-racking. It may be helpful to have a plan for what to do if your application is either approved or denied.
After Your OIC Is Approved
Having your OIC application approved is a relief, but in order to avoid default (meaning the IRS can pursue you for the original amount owed), it’s crucial to follow the terms of your agreement.
If you’ve chosen the periodic payment option, make your monthly payments on time and as agreed, or if you’re paying with a lump sum, send the full amount in five or fewer payments.
Once you’ve paid the full amount, you also must file all tax returns and make all required estimated payments for the next five years. If you have a federal tax lien, the IRS will not release it until all your obligations have been satisfied.
When Your OIC Is Denied
Many more OIC applications are rejected than approved. These are some common rejection reasons:
- You filed for bankruptcy
- The IRS believes you could pay more
- Approval is “not in the best interests of the government” (which often means you are believed to be reporting income inaccurately)
- Your offer was initially approved, but you did not file tax returns or make estimated payments afterward
If your OIC is denied, you still have options. If you file an appeal, you must do so within 30 days. While there’s no guarantee that you’ll be approved on appeal, the best way to increase your chances is to work with an experienced tax lawyer.
Can I Speed Up the Offer in Compromise Process?
You may be able to make the OIC process faster, but only up to a certain point. After all, any delays on the part of the IRS are beyond your control.
These steps may help make the process more efficient:
- Submit Complete Paperwork: Ideally, you should send all necessary documentation to the IRS with your application. Make sure to carefully review everything before sending to ensure you’ve included everything you need to.
- Respond Promptly to IRS Requests: When you immediately respond to any request from the IRS, your quick response time can make the process go much faster.
- Seek Professional Help: Qualified tax professionals can help you put together a complete application and can guide your communications with the IRS. The tax attorneys at Victory Tax Lawyers are here to help! When it comes to working with the IRS, having an attorney is always advisable. This is especially true when making an offer in compromise, which requires a large amount of complex information filed in a particular way.
How Much Does It Cost to File for an OIC?
When you file, you must pay a non-refundable application fee of $205 unless you meet the IRS’s low-income requirements. You also must send your initial payment (if you want to make periodic payments toward the balance) or 20% of your total offer amount (if you’re paying by lump sum).
Need Help Applying for an Offer in Compromise?
An offer in compromise might not be the answer for every tax debt. However, if you can afford to pay some of what you owe, an OIC can save you a considerable amount of money over time and give you the peace of mind of knowing your debt is resolved. For many, the process takes anywhere from several months to a year — but it can sometimes be longer.
While factors like IRS backlogs may slow down the application process, working with the best tax lawyer you can find will help you avoid making costly, time-consuming errors and increase your chances of fast approval. Contact Victory Tax Lawyers for your free attorney consultation today!
Frequently Asked Questions
How long will my Offer in Compromise take to complete?
It depends on a variety of factors, including how complex the case is, where you stay, and how prompt you are in responding to the IRS and submitting the required documentation. Most cases, however, are resolved in about six months to a year. Some more complex cases, however, extend beyond a year.
How likely are you to get an Offer in Compromise in Los Angeles?
Location does not directly influence the approval or rejection of your OIC application, as the IRS evaluates OICs uniformly nationwide. Approval generally hinges on the IRS’s estimation of your present financial situation, ability to pay, income, expenses, asset equity, and compliance with tax filings. Nationally, only about 30-40% of OICs are accepted, but each case is unique. It’s advisable to speak with a tax lawyer familiar with Los Angeles tax laws to go over your case with you.
How much does the IRS usually settle for?
The amount is not set in stone. It is often dependent on the taxpayer’s financial condition and what the IRS calculates as their Reasonable Collection Potential (RCP). This figure is calculated by considering your assets, income, expenses, and future earning potential. Settlements can range from 10-20% of the total tax debt in cases of limited income/assets, but this varies widely.
What is the 5-year rule for an Offer in Compromise?
If and after your OIC application gets approved, you’re expected to remain tax-compliant for 5 years. This means you must file all returns, pay your taxes on time, and avoid new debts during that time. Defaulting on any of these within this period can revoke the OIC, and reinstate your original tax debt.
Does an OIC affect my credit score?
An OIC itself does not affect your credit score. However, if you fail to pay your taxes, it may result in a federal tax lien, which can affect lenders’ perception of your creditworthiness.
Can I negotiate with the IRS for an Offer in Compromise in Los Angeles myself, or do I need a tax attorney?
Yes, it’s possible to submit and negotiate an OIC on your own, but the process is complex and requires you to thoroughly understand the tax laws and IRS procedures. A tax attorney is generally recommended, though, as they’re better equipped to handle negotiations with the IRS and maintain compliance with the tax laws.
