What Is the IRS Offer in the Compromise Process?

What Does the IRS Offer in Compromise Signify?

An Offer in Compromise (OIC) is a solution provided by the Internal Revenue Service (IRS) to troubled taxpayers. It helps pay off all their tax debts in a unique manner they find convenient and legal under the law. It acts as an agreement between the two parties, allowing the taxpayers to settle their liabilities at a specified amount significantly less than the owed sum. 

An Offer in Compromise serves as a legitimate option to pay off the tax debts when the taxpayer fails to acquire other means to do it. It also works when returning the owed amount can result in financial difficulty and hardship for the individual. When a person opts for this solution and enters the agreement, they have to pay back a fixed yet lowered amount in a given and set time. Meanwhile, the IRS forgives and gets rid of all the taxpayer’s liabilities. It can do so as long as they abide by the rules and promises of compliance. 

However, the eligibility criteria of the Offer in Compromise program are strict. Taxpayers capable of paying back the liabilities in their entirety through installations or some other means cannot qualify for it. Nevertheless, those who are eligible must ensure that they have all their tax returns filed. They must also have no outstanding tax payments or tax deposits to the Federal Government. 

The IRS considers a few overall factors and parameters to check and set the eligibility criteria for the Offer in Compromise comprise the following:

  • Yearly or Annual Income
  • Asset Equity
  • Necessary and Compulsory Expenses
  • Ability and Capability of Paying Back the Borrowed Sum

What are the Reasons for the IRS to Consent to an Offer in Compromise?

The IRS has solid and legal ground and reasons to accept and consent to an Offer in Compromise for any of the following purposes:

  • The IRS can consent to an Offer in Compromise in cases and instances where any doubt in liability arises. It meets the eligibility criteria when a genuine dispute in the amount or existence of the tax debt gets created. 
  • The second case is in which the IRS can agree to the Offer in Compromise if there is an issue or doubt whether the owed amount is collectible in its entirety. The uncertainty may arise when the taxpayer’s properties, income, and assets are significantly lower than the tax liability amount. 
  • The IRS can also consent to the Offer in Compromise on the basis and foundation of effective and necessary tax administration. The program or option can get accepted in cases where no doubt exists about the owed amount and its legality. In such instances, the entire due amount can get collected. The compromise exists to help when this collection puts financial stress and burden on the taxpayer. It can also be due to some unusual circumstances.

What are the Exceptions When a Taxpayer Does Not Need to Pay the Application Fee Necessary for the IRS Offer in Compromise?

All taxpayers have to pay a fixed amount as the application fee when they submit Form 656 to opt for the Offer in Compromise of the IRS or the IRS Fresh Start Program. This cost is entirely separate and distinctive from the other payments. The rest need to get paid off later on to settle the tax debt. 

However, two exceptions or cases exist where a taxpayer becomes free from paying the amount. The exemption criteria entail the following:

  • Firstly, the taxpayers do not need to pay the application fee if they opt for the Offer in Compromise based on uncertainty or doubt about their liability. 
  • Secondly, the application fee gets exempted if the taxpayer does not belong to any partnership, corporation, or group. They have to participate individually, not associated with someone else. They must also qualify for immunities because they earn a low yearly income. 

What are the Payment Options Offered by the IRS for the Offer in Compromise?

The IRS offers several payment options to a taxpayer. They can choose from the given choices and decide the means suitable for them and preferential to them. The various payment options include the following:

  • Lump-Sum Amount as Cash

Taxpayers have the option of paying back their tax debts in lump-sum amounts or as installment payments. Under this option, they can do so in five or lesser portions of repayment. It allows them to settle the owed money in a few months after they accept and opt for the Offer in Compromise. 

If an individual pays back in a lump sum, they must include a specific non-refundable amount. They must add this with Form 656 and the application fee they submit. It must be equal to at least 20% of the total offered sum. In this case, the taxpayer receives and retains the right of specifying the tax liability to which the payment percentage would get applied by the IRS. 

  • Periodic Payment

The periodic payment option allows the taxpayers to pay off their borrowed sum and tax debt in six months or more. They can return the amount in an increased number of installments. They can do so within a period of up to 24 months after the Offer in Compromise gets accepted. 

If an individual opts for the periodic payment option, they must submit the first installment payment amount they proposed. They have to do so together with Form 656. This sum must get paid along with the application fee. Generally, the amount is non-refundable, implying that it would not get returned under any circumstances once forfeited. 

Taxpayers have to continue with their installments under the terms of the periodic payment. They have to do so as the IRS evaluates and assesses the offer. These amounts fall under the non-refundable category as well. They get applied and added to the tax liabilities. 

In this case, the taxpayer receives and retains the right of specifying the tax liability to which the payment percentage would get applied by the IRS.