If you can’t pay your full tax liability or doing so would create a financial hardship, you may qualify for an offer in compromise under the IRS debt relief program. This article provides a step-by-step guide on how to apply for an offer in compromise, what forms you need and how to improve your chances of qualifying for the IRS debt relief program.
Every year, millions of Americans struggle to pay their taxes. If you are one of them, what can you do if your tax bill is more than you can pay? And what if you can’t afford an installment plan either? Will you face a tax lien or levy?
The good news is, the IRS offers a tax debt relief program called the Offer in Compromise (OIC). If you are facing financial hardship, the OIC can help you to settle your tax debt for less than you owe. But how?
What is the IRS debt relief program?
The IRS debt relief program is another term for the IRS Fresh Start program, which includes several tax relief options for struggling taxpayers. The program was created in 2011 and has since expanded to include a wide range of tax relief options. The People First Initiative, which helps people facing the challenges of COVID-19 issues, is the latest expansion. However, if you are searching for the IRS debt relief program you are probably really looking for the IRS Offer in Compromise program.
Read on to learn all you need to know about the OIC, including:
- What is an offer in compromise (OIC)?
- Who qualifies for an OIC?
- The OIC payment options.
- How to apply for an OIC.
- What happens after you apply for tax relief?
- The pros and cons of OICs.
- Answers to frequently asked questions about the OIC.
What is the Offer in Compromise tax relief program?
An Offer in Compromise (OIC) is an agreement between a taxpayer and the IRS that allows you to settle your federal tax debt (including back taxes) for less than you owe. Payment plans are then available so you can repay the settlement amount. According to the IRS, it’s an option for those who can’t afford to pay their balance or who will face a difficult financial situation by doing so.
To determine your eligibility, the IRS will assess if you can afford to pay by looking at your asset equity, income, and expenses. Offers are generally approved if the amount offered is the most the IRS can expect to collect in a reasonable amount of time. The OIC is meant to be a last resort after exploring all of the other options, such as installment agreements which break your tax debt (as it stands) into weekly or monthly payments.
If you can’t afford your unpaid taxes, you may be able to take the OIC route to find relief.
Why does the IRS offer tax debt forgiveness?
The truth of the matter is, the IRS misses out on more than $400 billion in tax revenue each year that Americans simply don’t pay. However, it has been able to increase the amount of money it recovers using tax relief programs like the OIC and installment agreements. By working with taxpayers to figure out what payments or settlement they can afford, the IRS ends up being able to collect more.
Who qualifies for an IRS Offer in Compromise?
To settle your tax debt with an OIC, the IRS requires you to have filed all of your tax returns. You also need to have paid any estimated payments that are due for the year. Additionally, you have to pay the OIC application fee which is currently $205 and you can’t be in an open bankruptcy proceeding.
OIC eligibility quick list for taxpayers:
- File every tax return legally required
- Can’t be in a bankruptcy proceeding
- Must have made all estimated payments for the year
- Must pay the application fee
Does everyone have to pay the fee?
There are two ways around the fee. The first is if you qualify as low-income. The second is if you submit a doubt of liability with your offer. If you don’t meet these basic requirements, your offer will be returned. While your application fee would be returned, any initial payment you make with your offer will be applied to your outstanding tax debt.
You can use the IRS OIC pre-qualifier tool to check your eligibility and avoid a denial.
What are the payment options for the OIC?
When you apply for IRS tax relief through the OIC, you’ll usually need to send an initial payment. When doing so, you have two options.
- Periodic payment: With this option, you make an initial payment and continue to make payments while your offer is under consideration. If accepted, you need to stick to the payment plan until the tax debt is paid in full.
- Lump-sum payment: With this option, you pay 20% of your offer upfront. If your offer is accepted, you must pay off the remaining tax debt within five payments.
If you qualify as low-income, you won’t need to send an initial payment or make payments while your offer is being considered. A tax relief company can help you review your options and figure out which is the best for you.
How can you apply for an Offer in Compromise?
To apply for an OIC, you’ll need to get all of your financial information and applicable tax returns together. Then, you’ll fill out some paperwork, including:
- Form 433-A OIC: This is used to collect information on your earnings and calculate an offer. It’s for individual wage earners, sole proprietors, and certain other unique situations.
- Form 433-B OIC: This form also collects information on earnings to help you calculate an offer. However, this is designed for businesses that are corporations, partnerships, and qualifying LLCs.
- Form 656: This is the paperwork for the Offer in Compromise itself. It will outline what your offer is and what years are included in the offer. You will outline the total amount of your offer and the payment plan terms.
- Any additional supporting documents: Form 433 will include a list of documents you need to include with your offer.
You’ll also need to include your payments for the application fee and initial payment (if applicable). Then, you’ll mail everything off to the IRS and cross your fingers!
(Note: You will only need to fill out one Form-433, either A or B).
Can tax relief companies help with OICs?
The OIC application process can be extremely tedious and confusing which is where tax relief companies often step in. These companies have trained tax experts who know the OIC process inside and out. They have often helped many clients submit offers so know what works and what doesn’t. Hiring a tax relief company can help to take the stress off your plate and get your tax debt settled quicker and more effectively. However, they will often charge a percentage of the debt they save you so it’s important to review and compare companies side by side to find the best deal.
What happens when you submit your OIC offer for tax relief?
Once you submit your OIC, you’ll have to wait for an answer from the IRS. If the IRS doesn’t respond within two years, your offer will be automatically accepted. During the waiting period, other collection activities will be suspended and you won’t need to make payments on an installment agreement you had before making the offer. However, a Federal lien can still be filed. Additionally, you will be required to make any payments that are promised by your offer.
If your offer is accepted, you must file any required tax return and make all payments due. Once your tax debt is repaid and your offer terms are fulfilled, any liens will be lifted. If your offer is denied, you have the option to appeal the rejection within 30 days using Form 13711.
Benefits of the IRS tax debt forgiveness program
As with anything, there are pros and cons to this IRS tax relief program; the Offer in Compromise. Here are some of the pros:
Stop IRS collection activities
If you continue to ignore your tax debt, the IRS can garnish your wages and pursue other collection activities. However, if you reach an agreement, they will not need to pursue other means of collecting your debt. Note that the IRS may still keep a tax lien in place until the full amount is paid.
A huge benefit to this program is that you could end up settling your tax liability for less than you owe, saving you on penalties and interest, along with the tax debt itself. This could help take some pressure off that heavy tax burden and enable you to pay off your debt more quickly.
Peace of mind
Once your offer is accepted, you can rest assured that you are on the road to recovery. You will no longer have a debt that you can’t afford hanging over your head. As long as you stick to your payment plan, you will be debt-free and back on track soon.
Drawbacks of the IRS tax debt forgiveness program
There are clearly several desirable benefits to the OIC program. However, it also has drawbacks.
The IRS now can delve into all of your past and present financial matters. They can review information like current and past bank accounts, credit cards, property, and business ownership.”
The biggest drawback to the IRS forgiveness program is that most people think they qualify when they don’t.
The processing time can also be painfully slow. The IRS may take up to two years to approve your paperwork.
And if you do not meet agreement terms, or pay on time for the next five years, you will owe the original tax debt amount — plus interest and penalties.
It is important to note that the IRS now can delve into all of your past and present financial matters. They can review information like current and past bank accounts, credit card accounts, property, and business ownership. In other words, do NOT lie or exaggerate if you do decide to file for a tax relief program – the IRS can see everything.
If you owe a lot of money to the IRS, it can help to have a relief company on your side. The best tax relief companies have tax lawyers and enrolled agents on staff, provide a money-back guarantee, and charge competitive rates.
Check out which tax relief company is the best fit for you.
FAQ on the OIC IRS Tax Debt Relief Program
Ready to owe less to the IRS but still have questions? Here’s a look at answers to some of the frequently asked questions about this tax debt relief program.
Is an OIC or installment agreement better?
According to IRS, the OIC is a last resort. Further, it opens up all your finances to the government which can be less than desirable. An installment agreement won’t result in tax relief in the form of forgiveness but it can help you to find a payment plan you can afford. The right fit will depend on your particular situation (e.g. how much you owe in back taxes, if you can afford a payment plan, if you qualify for an OIC, etc.).
Compare various IRS tax relief programs.
What if the IRS says your OIC is too low?
What happens if you can’t pay your tax bill and you file an OIC but the IRS says it’s too low? In this case, the IRS will figure out the correct offer amount and give you a chance to increase your original offer. If you don’t, the offer will be rejected. Further, if the IRS determines you can pay your tax bill, you will still be able to opt for an IRS installment agreement (payment plans).
What if I haven’t filed all my tax returns and apply for an OIC?
You must file all of the tax returns legally required of you before your OIC will be accepted.
Who qualifies as low-income according to the IRS?
You can determine if you qualify as low-income in Section 1 of Form 656. You’ll find a chart that lists the maximum gross income by state and family size. If you make equal to or less than the limit, you will be low-income certified. This means you won’t have to pay the application fee or initial payment.
What if you don’t owe your tax debt?
If you have received a bill for a tax debt you don’t believe you owe, you can file form 656-L. This is a form that requests the OIC for the reason of (Doubt of Liability). However, you can only file one OIC at a time. Being so, if you have some tax debt you rightfully owe but can’t pay, and some that you doubt you owe, you will need to file the OICs separately. First file the OIC Doubt of Liability. Once that’s settled, file the OIC based on your ability to pay.
What is the IRS Fresh Start Program?
The IRS Fresh Start Program is a program that is designed to allow taxpayers to pay off substantial tax debts affordably over the course of six years. Taxpayers make monthly payments that are based on their current income and the value of their liquid assets.
Do I qualify for the IRS Fresh Start Program?
The IRS Fresh Start initiative expanded several programs to help taxpayers struggling with unpaid taxes. The Fresh Start program increased the threshold to qualify for a streamlined installment agreement from $25,000 to $50,000 if the balance can be paid in full within six years (previously five years).
Does an OIC application affect your credit?
Taxpayers who apply for an OIC do not have to worry about it appearing on their credit reports. Further, since 2018, tax liens also will not appear on your credit.
Does the IRS forgive tax debt after 10 years?
In general, the Internal Revenue Service (IRS) has 10 years to collect an unpaid tax debt. After that, the debt is wiped clean from its books and the IRS writes it off. This is called the 10 Year Statute of Limitations. It is not in the financial interest of the IRS to make this statute widely known.
Can you pay an OIC with a credit card?
Yes, taxpayers can make payments to the IRS with a credit card.
Can I get the IRS to waive penalties and interest?
The IRS does not provide relief from interest charged in cases of reasonable cause or first-time penalty relief. However, these can be reduced through the OIC relief program.
Find tax relief companies that can help
Taxpayers that owe tax debt may feel in over their heads. Of all the organizations you could owe, the IRS has the furthest reach when it comes to the ability to collect. However, thankfully, it has many programs in place to help you square up.
The Offer in Compromise is a helpful option for those that qualify that can provide true relief. The process will help you and the IRS determine a settlement amount that you can reasonably pay, and then you just need to follow through.
If you’d like help with the process to ensure you get the best deal possible, consider tax relief companies. A tax professional can help you navigate each step of the process, ensure that you file all the correct paperwork, and get you through the process as quickly (and painlessly) as possible.
Not sure where to start? Click here to compare companies and get a free consultation with a leading tax relief attorney.
Jessica Walrack is a personal finance writer at SuperMoney, The Simple Dollar, Interest.com, Commonbond, Bankrate, NextAdvisor, Guardian, Personalloans.org and many others. She specializes in taking personal finance topics like loans, credit cards, and budgeting, and making them accessible and fun.