Depending on your circumstances, tax season could bring with it an exciting financial windfall or the horror of discovering that you owe a tax debt to the IRS. If you fall into the latter category, the good news is that you don't have to pay your tax debt in one lump sum. You can apply for a tax debt settlement arrangement with the IRS known as an offer in compromise or, more often, an "OIC."
How the Offer in Compromise Works
When you owe a tax debt, the IRS will send you written notice of your debt. When you receive your IRS bill, you have three options:
- Pay the debt in one lump sum.
- Pay the debt in installments
- Settle the debt with an OIC
Like other forms of debt settlement, an offer in compromise allows you to pay less than the amount you actually owe. You can pay an OIC either through a lump sum settlement or by making periodic payments on your delinquent taxes until you satisfy the debt.
Offer in Compromise Restrictions and Guidelines.
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| The IRS has overwhelming collection power |
1. Possible Billing Errors – If any doubt exists as to whether or not you actually owe the debt, the IRS will accept your offer in compromise. The same is true if doubt exists about whehter or not the tax debt the IRS demands is accurate. Unfortunately, doubt on your part alone isn't enough to convince tax officials that you deserve a settlement. Personally, I find it chilling that if there is a chance that the debt isn't even yours, the IRS will grant you a settlement, but you still have to pay the debt – even when the IRS knows it may not be yours. Scary, eh?
2. Debt Not Collectible – Some consumers get a tax bill only to discover that the amount they owe exceeds their assets. The IRS has extensive collection rights and can generally seize almost all of your assets when attempting to collect a debt. If the sum of your tax debt exceeds the total value of your assets, its much easier on the IRS to grant you a tax settlement than expend time and resources to collect a debt that isn't fully collectible anyway.
3. Economic Hardship – The IRS wants the delinquent taxes you owe, but it doesn't want to leave you so broke that you can't continue paying taxes in the future. Thus, if you can demonstrate that paying your tax debt would leave you and your family completely destitute, the IRS will generally approve your application for a tax settlement.
How to Apply for an OIC
You'll need to use different forms to apply for an OIC depending on which criteria you meet. If, for example, you are applying for a tax settlement based on possible billing errors, you must fill out and send in Form 656–L. If, however, your OIC request is based on a possible economic hardship or a lack of assets, you must fill out and send in Form 656 and Form 433-A.
Unlike debt collection settlements, there is no negotiating your settlement for a federal tax debt. You are responsible for including your offer in your OIC paperwork. The IRS then either accepts or rejects your offer. Before acceptance or rejection takes place, expect the IRS to request extensive paperwork from you to validate your income and assets. The IRS will continue to apply penalties and fees to your tax debt during the evaluation process.
OIC Application Costs
The IRS charges a fee of $150 to evaluate your OIC request. The $150 fee is nonrefundable, regardless of whether the IRS approves or denies your tax settlement. This fee does not apply if you are requesting an OIC based on possible billing errors or if your income falls below 250% of federal poverty guidelines.
When you submit your settlement offer, you have the option to pay your delinquent taxes via a lump sum settlement or installments. If you select the lump sum option, you must include a good faith payment of 20% of the proposed settlement offer with your OIC application. If you select the option to pay your tax debt in installments, you must include the first payment with your OIC request. Like the application fee, the initial good-faith payment is nonrefundable. If the IRS denies your OIC application, it will apply the payment you made to the tax debt you owe.
A settlement via an offer in compromise is a good option for those with overwhelming amounts of tax debt. If you don't qualify for an OIC, however, keep in mind that the IRS will provide you with a payment plan that allows you to pay off your delinquent taxes over time.
3. Economic Hardship – The IRS wants the delinquent taxes you owe, but it doesn't want to leave you so broke that you can't continue paying taxes in the future. Thus, if you can demonstrate that paying your tax debt would leave you and your family completely destitute, the IRS will generally approve your application for a tax settlement.
How to Apply for an OIC
You'll need to use different forms to apply for an OIC depending on which criteria you meet. If, for example, you are applying for a tax settlement based on possible billing errors, you must fill out and send in Form 656–L. If, however, your OIC request is based on a possible economic hardship or a lack of assets, you must fill out and send in Form 656 and Form 433-A.
Unlike debt collection settlements, there is no negotiating your settlement for a federal tax debt. You are responsible for including your offer in your OIC paperwork. The IRS then either accepts or rejects your offer. Before acceptance or rejection takes place, expect the IRS to request extensive paperwork from you to validate your income and assets. The IRS will continue to apply penalties and fees to your tax debt during the evaluation process.
OIC Application Costs
The IRS charges a fee of $150 to evaluate your OIC request. The $150 fee is nonrefundable, regardless of whether the IRS approves or denies your tax settlement. This fee does not apply if you are requesting an OIC based on possible billing errors or if your income falls below 250% of federal poverty guidelines.
When you submit your settlement offer, you have the option to pay your delinquent taxes via a lump sum settlement or installments. If you select the lump sum option, you must include a good faith payment of 20% of the proposed settlement offer with your OIC application. If you select the option to pay your tax debt in installments, you must include the first payment with your OIC request. Like the application fee, the initial good-faith payment is nonrefundable. If the IRS denies your OIC application, it will apply the payment you made to the tax debt you owe.
A settlement via an offer in compromise is a good option for those with overwhelming amounts of tax debt. If you don't qualify for an OIC, however, keep in mind that the IRS will provide you with a payment plan that allows you to pay off your delinquent taxes over time.
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