What is an IRS Offer in Compromise (OIC)?
We'll dive into the details below, but taxpayers should understand that, as implied in its' name (Offer in Compromise), the taxpayer seeks to establish a contractual relationship with the IRS, that if accepted by the IRS, places certain contractual duties on the taxpayer.
An Offer in Compromise (OIC) is a program offered by the Internal Revenue Service (IRS) that allows taxpayers to settle their taxes for less than the full amount they owe. The IRS may accept an OIC if it determines that the taxpayer cannot pay the full amount of taxes due or if the payment of the full amount would create an undue hardship for the taxpayer (“currently uncollectable”).
To be eligible for an OIC, a taxpayer must be current on all tax filing and payment requirements, and must not be in an open bankruptcy proceeding. The taxpayer must also have made all required estimated tax payments for the current tax year.
To apply for an OIC, a taxpayer must complete and submit Form 656, Offer in Compromise, along with a nonrefundable application fee and an initial payment. The IRS will review the taxpayer's financial situation and determine whether an OIC is appropriate based on the taxpayer's ability to pay, the value of their assets, and their income and expenses. If the OIC is accepted, the taxpayer must then complete the terms of the OIC, which may include making payments over a period of time.
It's important to note that an OIC is not always granted, and the IRS may reject an OIC if it determines that the taxpayer has the ability to pay the full amount of taxes owed. If the OIC is rejected, the taxpayer may have to pay the full amount of taxes owed or consider other options, such as entering into an installment agreement or seeking relief through bankruptcy.
How much can I offer in an OIC?
I have an extensive discussion on this topic in my recent blog post. My post details what considerations you should make regarding your offer and gives you a formula of what the successful offer amount looks like. Click here to read the post.
How does the IRS determine if a taxpayer cannot pay the full amount of taxes due when evaluating an Offer in Compromise?
When evaluating an Offer in Compromise (OIC), the Internal Revenue Service (IRS) will consider the taxpayer's financial situation to determine if the taxpayer has the ability to pay the full amount of taxes due. The IRS will consider several factors in making this determination, including the taxpayer's income, expenses, and assets.
To determine the taxpayer's ability to pay, the IRS will review the taxpayer's financial information, including information about the taxpayer's income, debts, and expenses. The IRS will compare this information to the taxpayer's tax liability to see if the taxpayer has the financial means to pay the full amount of taxes owed.
The IRS will also consider the value of the taxpayer's assets when evaluating an OIC. This includes any real estate, vehicles, savings accounts, or other valuable items that the taxpayer owns. If the taxpayer has significant assets that could be sold to pay the tax debt, the IRS may be less likely to accept an OIC.
In addition to considering the taxpayer's income, expenses, and assets, the IRS will also consider the taxpayer's compliance with tax laws. If the taxpayer has a history of failing to file tax returns or pay taxes on time, the IRS may be less likely to accept an OIC.
Overall, the IRS will consider all of these factors to determine whether the taxpayer has the ability to pay the full amount of taxes due or if an OIC would create an undue hardship for the taxpayer.
When does the IRS consider an account "currently uncollectable"?
The Internal Revenue Service (IRS) may consider an account "currently uncollectable" if the taxpayer is unable to pay the full amount of taxes owed due to financial hardship. This means that the IRS has determined that it is unlikely that the taxpayer will be able to pay the full amount of taxes owed in the near future.
There are several factors that the IRS will consider when determining whether an account is currently uncollectable, including the taxpayer's income, expenses, and assets. The IRS will also consider the taxpayer's compliance with tax laws, including the taxpayer's history of filing tax returns and paying taxes on time.
If the IRS determines that an account is currently uncollectable, it may take steps to temporarily suspend collection activities, such as garnishing wages or levying bank accounts. The IRS may also consider other options, such as offering the taxpayer an installment agreement or an Offer in Compromise, to help the taxpayer resolve their tax debt.
It's important to note that an account being considered "currently uncollectable" does not mean that the tax debt has been forgiven or that the taxpayer is no longer responsible for paying the taxes owed. The taxpayer will still be required to pay the taxes owed at some point in the future, either through a payment plan or other arrangement.
This calculation boils down to what the IRS call "Reasonable Collection Potential" or RCP. Quoting Professor Bryan Camp, George H. Mahan Professor of Law, Texas Tech University:
At the same time, Congress recognizes that, sometimes, circumstances should permit payment of less than the full amount. The Offer In Compromise (OIC) process is designed to address those situations. The ability to secure an OIC, however, must always be evaluated against a default of full payment, not against a default of no payment.
What does the IRS consider when the taxpayer claims doubt as to liability in an offer in compromise?
When a taxpayer claims doubt as to liability in an Offer in Compromise (OIC), the Internal Revenue Service (IRS) will consider whether there is a legitimate basis for the taxpayer's claim that they do not owe the full amount of taxes that have been assessed.
In order for the IRS to consider a claim of doubt as to liability, the taxpayer must provide sufficient evidence to support their claim. This may include documentation or other evidence showing that the taxpayer did not owe the taxes in question, or that the amount of taxes owed was incorrect.
The IRS will carefully review all of the evidence provided by the taxpayer and consider whether it is sufficient to support the claim of doubt as to liability. If the IRS determines that there is a legitimate basis for the claim, it may consider accepting the OIC on that basis. If the IRS determines that the claim is not supported by sufficient evidence, it may reject the OIC and require the taxpayer to pay the full amount of taxes owed.
It's important to note that a claim of doubt as to liability is just one factor that the IRS will consider when evaluating an OIC. The IRS will also consider the taxpayer's financial situation, including their income, expenses, and assets, to determine whether the OIC should be accepted.
What percentage of OIC applications are accepted?
It is difficult to determine the exact percentage of Offer in Compromise (OIC) applications that are accepted by the Internal Revenue Service (IRS), as the acceptance rate can vary from year to year and depend on a variety of factors. However, according to IRS data, the overall acceptance rate for OICs has ranged from around 35% to 50% in recent years.
It's important to note that the IRS does not automatically accept or reject an OIC based on a fixed set of criteria. Instead, the IRS will carefully review each OIC application on a case-by-case basis, considering the taxpayer's financial situation and other relevant factors to determine whether the OIC should be accepted.
Factors that may increase the likelihood of an OIC being accepted include the taxpayer's inability to pay the full amount of taxes owed due to financial hardship, the taxpayer's compliance with tax laws, and the existence of doubt as to liability (i.e., the taxpayer's claim that they do not owe the full amount of taxes that have been assessed).
If you are considering submitting an OIC, it's important to carefully review the requirements and eligibility criteria and gather all necessary documentation to support your application. An experienced tax professional can also help you prepare and submit an OIC and advise you on your options for resolving your tax debt.
How long does it take to process an OIC?
The processing time for an Offer in Compromise (OIC) can vary, but it typically takes several months to a year from the date of submission. The exact processing time will depend on various factors, including the complexity of the case, the workload of the IRS, and the completeness of the submitted information. The IRS has set a goal of processing most OICs within 24 months. However, in some cases, the processing time can be longer or shorter, and the taxpayer may need to provide additional information or documentation during the process. It's important to note that submitting an OIC does not stop the collection process, so taxpayers should continue to make any required payments until a resolution is reached. The more complete your information, and the accuracy of the data used and how it portrays your financial story has a big impact on how long the actual process will take to complete.
Can an Offer in Compromise be revoked?
Yes, an Offer in Compromise (OIC) can be revoked under certain circumstances. The IRS may revoke an OIC if the taxpayer fails to comply with the terms of the agreement, such as not making required payments or failing to file required tax returns. The IRS may also revoke an OIC if the taxpayer's financial situation improves and the IRS determines that the taxpayer is now able to fully pay the tax debt. Additionally, if the taxpayer provides false information on their OIC application, the IRS may revoke the offer and pursue collection action. It's important for taxpayers to carefully review the terms of an OIC and comply with all requirements in order to maintain their agreement with the IRS. What is an Offer in Compromise?
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