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Preparing and Submitting an Offer In Compromise

Offer In Compromise

Preparing and Submitting an Offer In Compromise: Step-by-Step Guide

  • Assess Your Eligibility: Determine if you meet the IRS criteria for an Offer In Compromise (OIC). This includes assessing your income, expenses, assets, and future earning potential.
  • File All Tax Returns: Ensure that all required tax returns have been filed before submitting an OIC. Failure to do so can result in your application being rejected.
  • Calculate Your Offer Amount: Calculate the amount you can reasonably offer to settle your tax debt. This involves assessing your income, expenses, and the equity in your assets. The IRS provides guidelines to help determine this amount.
  • Complete Form 656: Download and fill out IRS Form 656, Offer in Compromise. This form serves as your official proposal to settle your debt. Include all required financial documentation and details about your offer amount.
  • Submit Application Fee and Initial Payment: Along with your completed Form 656, include a non-refundable application fee and an initial payment based on your offer amount. The IRS will keep the initial payment if your offer is accepted or apply it to your tax debt if your offer is rejected.
  • Await IRS Review: The IRS will review your OIC application. This process can take several months, during which they will assess your financial situation thoroughly.
  • Respond to IRS Requests: Be prepared to provide additional documentation or clarification if the IRS requests it during their review.
  • IRS Acceptance or Rejection: The IRS will notify you of their decision regarding your OIC. If accepted, you can proceed to pay the agreed-upon settlement amount. If rejected, you have the option to appeal the decision or explore other tax relief options.
  • Payment Options: You can choose to pay the accepted offer amount in a lump sum or through a periodic payment plan. Ensure you adhere to the payment schedule to maintain your OIC status.
  • Comply with Tax Obligations: While your OIC is in effect and for five years after its acceptance, you must stay in compliance with all tax laws, filing your returns and paying any taxes owed promptly.

Preparing and submitting an Offer In Compromise is a complex process that requires careful consideration of your financial situation and adherence to IRS guidelines. If done correctly, it can provide substantial debt relief and a fresh start in managing your tax obligations.

Frequently Asked Questions

What is an Offer in Compromise (OIC), and how does it work?

An Offer in Compromise is a program offered by the IRS that allows eligible taxpayers to settle their tax debt for less than the full amount owed. It’s designed to help individuals and businesses who are facing financial hardship and cannot afford to pay their entire tax liability.

Who is eligible to apply for an OIC?

Eligibility for an OIC is determined by the IRS based on your financial situation. To be eligible, you must demonstrate that paying your tax debt in full would cause financial hardship or be inequitable. The IRS considers factors such as your income, expenses, assets, and future earning potential.

What types of tax debt can be included in an OIC?

Most types of federal tax debt can be included in an OIC, including income tax, self-employment tax, and certain penalties and interest.

How is the OIC amount determined?

The IRS calculates the OIC amount based on your ability to pay. This involves a comprehensive review of your financial situation, including your income, expenses, assets, and future earning potential. The final offer amount is typically a compromise between what you owe and what you can reasonably pay.

How do I prepare and submit an OIC?

To prepare and submit an OIC, follow these steps:

  • Complete IRS Form 656, Offer in Compromise.
  • Submit the required application fee and initial payment (if applicable).
  • Provide all requested financial documentation, including income, expenses, and asset information.
  • Mail the completed OIC package to the appropriate IRS address, as specified in the instructions.
Is there a fee to apply for an OIC?
Yes, there is a non-refundable application fee for submitting an OIC. However, this fee may be waived or reduced based on your income and financial hardship. Check the IRS guidelines for the most up-to-date fee information.
What happens after I submit my OIC application?
After submitting your OIC application, the IRS will review it, and this process may take several months. During this time, the IRS may request additional information or documentation. Be prepared to respond promptly to any requests.
What are my options if my OIC is accepted?
If your OIC is accepted, you will need to comply with the terms of the agreement. This typically includes making the agreed-upon payments and staying current on your tax obligations for a specified period (usually five years).
What if my OIC is rejected?
If your OIC is rejected, you have the right to appeal the decision. You can also explore alternative options, such as setting up an IRS Installment Agreement or seeking professional tax advice.
Is it advisable to seek professional help when preparing and submitting an OIC?
Yes, many individuals and businesses find it beneficial to work with tax professionals, such as tax attorneys or enrolled agents, when preparing and submitting an OIC. These professionals can provide guidance, ensure your application is complete and accurate, and improve your chances of a successful outcome.

Remember that the OIC process can be complex, and professional assistance can be invaluable in navigating it effectively.

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