An Offer in Compromise (OIC) is an IRS program designed to help individuals settle their tax liabilities for less than the full amount owed. Great as it may be, understanding how it might negatively impact your credit is essential before applying. Poor credit can limit borrowing power, increase costs, and hinder financial goals. And while an OIC doesn’t directly affect your credit score, related factors like tax liens might. Successfully resolving tax debts through an OIC can pave the way toward improved financial stability and restored creditworthiness.
Are you overwhelmed by tax debts? We don’t just negotiate—we get results. At Victory Tax Lawyers, we have a long list of Offer in Compromise success stories. Book your free attorney consultation today to reduce what you owe and stop the IRS in its tracks.
Let us guide you through this process to resolve your tax debt effectively and protect your financial future. This post covers everything you need to know about the credit implications of an OIC.
What Is an IRS Offer in Compromise?
An IRS Offer in Compromise (OIC) is a program that allows taxpayers to settle their tax debts for less than the total amount owed. It is specifically designed to provide relief to individuals who are unable to fully pay their tax liabilities due to financial hardship. By aligning repayment terms with a taxpayer’s unique financial situation, the program offers a manageable path to resolve overwhelming tax debt while restoring stability.
An IRS Offer in Compromise (OIC) is a program that allows taxpayers to settle their tax debts for less than the total amount owed. It is specifically designed to provide relief to individuals who are unable to fully pay their tax liabilities due to financial hardship. By aligning repayment terms with a taxpayer’s unique financial situation, the program offers a manageable path to resolve overwhelming tax debt while restoring stability.
The OIC application process requires submitting Form 656 along with detailed financial documentation, including income, expenses, and asset information. The IRS carefully evaluates this data to determine if it meets eligibility criteria. Depending on their circumstances, not everyone can opt for a lump-sum offer or periodic monthly payments to meet their settlement obligations. Successfully navigating this process requires a clear understanding of IRS requirements and the preparation of financial statements.
Are You Eligible for an IRS Offer in Compromise Program?
Eligibility for an OIC is not guaranteed, and only those demonstrating true financial hardship or liability disputes qualify. The process is highly selective, and the IRS uses stringent criteria to ensure the program is reserved for those in genuine need.
To qualify, taxpayers must meet basic requirements, including filing all required tax returns and making current-year estimated tax payments. The IRS further evaluates applications based on three primary grounds:
- Doubt as to Liability – This applies when there is a legitimate uncertainty about the accuracy of the tax amount owed. For example, a taxpayer disputing an IRS assessment due to clerical errors may qualify based on this criterion.
- Doubt as to Collectability – Arises when the taxpayer’s current financial situation indicates they cannot fully pay the debt within the statutory collection period. For instance, a taxpayer with limited income and significant medical expenses may qualify.
- Effective Tax Administration – This applies when paying the full amount owed would cause undue financial strain, even if the debt is otherwise collectible. For example, a retired taxpayer reliant solely on Social Security may fall under this category.
Maintaining estimated tax payments is a critical component of eligibility. Doing so helps keep the taxpayer compliant with IRS requirements throughout the application process. Falling behind on these payments could jeopardize your application and payment options, so careful planning and ongoing diligence are essential for passing IRS reviews.
Does an Offer in Compromise Affect Your Credit Score?
An Offer in Compromise (OIC) does not directly impact your credit score, as the IRS does not report OICs to credit bureaus. However, the related processes, such as federal tax liens filed for unpaid taxes, can indirectly affect your credit. Tax liens, which are public records, can significantly lower your score.
The good news is that resolving your tax debt through an OIC can lead to the release of a lien, removing its impact on your credit over time. Properly managing your tax debt with an OIC not only offers financial relief but also helps protect your credit from further damage.
Will my credit score improve after paying off the IRS through an OIC? Potentially, yes. Reducing your tax liability can improve your debt-to-income ratio and may positively influence your credit score over time.
Factors That Could Indirectly Impact Your Credit
While an OIC doesn’t directly hit your credit score, several related factors can influence your creditworthiness. Managing these wisely is key to minimizing negative impacts. A tax lien, one of the most detrimental marks to your credit, can linger on your report for up to seven years, even post-payment.
The difference between outstanding tax debt and settled debt is vast in terms of financial standing. Settling tax debt can enhance your creditworthiness by demonstrating responsible management of liabilities. An OIC can further support this by removing a tax lien if your offer is accepted and paid in full. Once completed, the IRS will release any liens, potentially clearing your credit report of this negative mark.
Acceptance of an OIC can pave the way for financial stability. By reducing your tax burden, you free up resources, allowing for better financial planning and potentially improving your credit over time.
How Does an Offer in Compromise Work?
Navigating the IRS’s Offer in Compromise pathway requires a meticulous approach. The process is detailed and involves several steps, from application to IRS decision:
1. Submit the OIC Application
The first step is gathering all the relevant documentation that serves as evidence of your financial situation. Start by downloading Form 656-B Booklet, which basically outlines every form you need to complete and submit your OIC application. This includes:
- Form 433-A if you’re a wage earner or self-employed, or Form 433-B if you operate as a business. Both forms detail your financial information.
- Form 656, which is your official offer to the IRS. Here, you’ll outline the tax years and the specific tax you’re requesting a compromise for. You’ll need to submit separate forms if you’re resolving both personal and business tax debts. The financial details provided on this form must be accurate and comprehensive.
2. Pay the Application Fee and Initial Payment
Submitting an OIC comes with upfront non-refundable costs. The application fee is $205, and as we mentioned, it is non-refundable even if your offer ends up being rejected. In addition to your application fee, you’ll need to include an initial payment for each Form 656 you submit.
The initial payment is also non-refundable. However, it will be applied to reduce your tax debt if your offer ends up being approved. These fees demonstrate your commitment to resolving your tax debt and are part of the offer submission process.
3. Make Payment
You have two payment options to choose from for your initial payment: periodic payment or lump sum cash payment. If you’d rather make payments periodically, you’ll be required to submit your first installment with your application and continue to make monthly payments while the IRS reviews your offer. If your offer is accepted, you will continue to make monthly payments over a stipulated period, typically within 6 to 24 months.
If you prefer the lump sum cash payment plan, the IRS requires you to include 20% of the total offer amount along with your application fee. If your offer is approved, you’re then to pay up the remaining balance in no more than five installments.
When considering the payment plan to settle for, choose wisely based on your financial capacity. A lump-sum payment can signal to the IRS your urgency and capability to resolve your remaining balance and tax issues swiftly. By paying 20% upfront, you not only reduce the total amount owed but also potentially speed up the acceptance process by demonstrating immediate financial commitment.
On the other hand, periodic payments allow for breathing room, spreading your tax burden over up to 24 monthly installments. It’s tailored for those who need time to reorganize their finances while still showing commitment to settling their IRS debt.
4. Wait for IRS Review
The IRS evaluates the value of your assets against your outstanding tax liability. This assessment determines whether liquidating assets could reasonably cover your debt. Usually, the review period spans anywhere from six to twelve months. The IRS’s scrutiny in the Offer in Compromise process is quite thorough.
They consider multiple factors when evaluating your offer, including all the documents you must have provided, such as your bank statements and tax returns. They also check your earnings and spending over the past two years.
Beyond numbers, they look at your financial habits, future income potential, and whether the offer aligns with your long-term financial stability. Their analysis involves evaluating your employment status, potential for income growth, and any debts, living expenses, or liabilities that could affect your financial future.
In addition to these, they assess your asset equity to determine if liquidating assets like real estate or stocks could cover your tax debt. Finally, the IRS checks your overall financial health and your ability to pay. All of these are done to confirm that your offer genuinely reflects your assertion of being unable to pay your full tax debt.
Pros and Cons of an Offer in Compromise on Your Financial Health
An Offer in Compromise can be a financial lifeline, but it’s not without its considerations. Understanding both the advantages and drawbacks can help you make an informed decision that aligns with your financial goals. The table below outlines the key pros and cons to consider:
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When compared to other tax resolution methods like installment agreements or partial payment plans, an OIC might offer quicker relief but requires a significant upfront commitment in terms of documentation and an initial payment option that is non-refundable.
How to Minimize Credit Impact While Pursuing an Offer in Compromise
Strategic foresight is crucial when dealing with tax debt. Minimizing the impact on your credit while pursuing an OIC involves strategic actions. Here’s how to approach this:
- Manage Your Credit – Manage your credit by focusing on paying all other debts on time and keeping your credit utilization low. Be aware that the IRS will assess your reasonable collection potential, including your ability to make required payments, during the evaluation process for your Offer in Compromise.
- Avoid Tax Liens or Address Existing Ones – Negotiate lien release where possible and pay or settle any current tax liabilities promptly.
- Prioritize Good Credit Building Habits – Routinely check your credit report for errors and continue to work on improving your credit score through responsible fiscal management. This means minimizing monthly expenses while the IRS determines if you’re eligible for a compromise application.
- Seek Professional Guidance – An experienced IRS tax attorney can help you navigate the complexities of an OIC effectively. For example, our team will secure the best possible outcome for your OIC while safeguarding your financial future by minimizing any potential negative impact on your credit.
What Happens After the IRS Accepts Your Offer in Compromise?
It’s great news if the IRS accepts your offer, but it’s not the end. The work continues because any default on your part could set you back to square one. To keep your settlement intact, you must stick to these conditions:
- Ongoing Payments: You cannot risk defaulting on your required payments. This is why we advise that you think it through and choose the payment plan that accommodates your current financial situation. If you opted for periodic payments, make sure you allocate a certain portion of your income to your expected monthly spend until your debt is fully paid off. If you settled with lump sum cash payments, ensure you budget your income so that you don’t go past the stipulated agreement.
- Tax Compliance: If your offer is approved, the IRS expects you to maintain compliance for at least five years following the approval of your OIC. This means paying taxes on time and filing all required tax returns.
- Stay in Communication with the IRS: If your income drops, you somehow miss a payment, or make a mistake on a return, contact the IRS right away. Do not wait until they send you a letter. Acting fast might help you avoid default or adjust your terms. Ignoring problems or not updating the IRS can quickly land you in non-compliance and ruin all the effort you have put in.
What Happens to My Credit if My OIC Is Rejected?
An OIC rejection does not directly affect your credit score. However, unresolved tax debts might lead to liens and impact your financial credibility and acceptance rate. A rejected OIC can strain your financial stability, as you’ll need to find another way to deal with your tax debt, potentially delaying credit recovery. If the IRS rejects your OIC, consider learning about other IRS payment plans or appealing the decision.
Secure Your Offer in Compromise Today With Our Tax Pros!
When navigating the intricacies of an Offer in Compromise, the stakes couldn’t be higher. Mastering this process requires the expertise of a seasoned tax attorney for a strategic resolution.
A qualified tax professional acts as your advocate and safeguards your credit and financial stability when dealing with the IRS. Their proficiency in complex tax scenarios provides the relief you need at critical times.
At Victory Tax Lawyers, we zero in on the outcomes that matter most. From crafting customized OIC strategies to overseeing every case detail, let us take on the challenge for you. Schedule your free attorney consultation now.
Your resolution journey starts here. Rely on Victory Tax Lawyers for the expertise and advocacy required to navigate your tax challenges and achieve the financial peace you deserve.
FAQ
Does an Offer in Compromise hurt your credit?
No, an Offer in Compromise doesn’t directly impact your credit score. The IRS doesn’t notify credit agencies, so the OIC itself won’t show up on your credit report. What you may, however, have to worry about could be liens. If the IRS filed a lien before your offer was approved, that is public knowledge that could impact your ability to access credit.
Can an Offer in Compromise improve my credit score?
An Offer in Compromise (OIC) can potentially improve your credit score by reducing your overall debt, but it does not automatically erase negative marks like missed payments. For example, if your OIC settles a large tax debt, it could lower your debt-to-income ratio, which may benefit your score over time.
Will my credit history be visible to the IRS during my OIC application process?
No, the IRS does not review your credit history when evaluating your OIC application. While they look at your financial ability to pay, they do not consider your credit report.
Are credit agencies informed when I submit an Offer in Compromise?
No, credit agencies are not automatically notified when you submit an OIC. However, if the IRS accepts your offer, it could indirectly affect your credit by reducing outstanding debts and your tax liability, which might eventually show up on your credit history.
What are the best ways to protect your credit score during an Offer in Compromise?
While submitting an Offer in Compromise (OIC) can help reduce your tax debt, it’s important to continue managing your credit responsibly. Here are some strategies to protect your credit score during the process:
- Keep making regular payments on other debts
- Monitor your credit regularly for any inaccuracies
- Avoid missing payments on existing credit accounts
For example, continuing to pay off car loans or credit cards while your OIC is in progress helps maintain a stable credit profile during collection activities.
How Long Does an IRS Offer in Compromise Take?
An IRS Offer in Compromise typically takes between 6 to 12 months to process. For example, if you submit an offer in January, you may not hear back from the IRS until the summer or fall of that same year. By then, you may be able to swing a full payment or get an initial offer that reduces your tax liability and results in fewer payments.
What Tool does the IRS provide to help determine qualification for an Offer in Compromise?
The IRS offers a free Offer in Compromise Pre-Qualifier Tool on their website. It’s a quick and helpful tool that helps you assess your eligibility before you start your application process. The tool evaluates your financial information and tax filing status to determine whether you might qualify for an Offer in Compromise.
