How to Prepare for Submitting an IRS Offer in Compromise

Orlando R. Dizon

·April 12, 2024

·10 min read

How to Prepare for Submitting an IRS Offer in Compromise — Image Source: unsplash

Understanding the IRS Offer in Compromise

When dealing with tax debt, it's crucial to understand the option of an Offer in Compromise (OIC) provided by the Internal Revenue Service (IRS). This program allows taxpayers to settle their tax liabilities for less than the full amount owed. It is essential to comprehend the circumstances under which an OIC can be considered and the general requirements associated with it.

What is an Offer in Compromise?

Defining the Offer in Compromise (OIC)

An Offer in Compromise is a legal agreement between a taxpayer and the IRS that resolves the taxpayer's tax liability by paying a reduced amount. This option provides individuals facing financial hardship or those who have doubt as to whether they owe the full amount of tax an opportunity to settle their debts.

When to Consider an OIC

Taxpayers should consider an Offer in Compromise when they are unable to pay their full tax liability or when doing so would create a significant financial hardship. It is also applicable for individuals who have genuine doubt as to whether they owe the full amount of tax sought by the IRS.

General Offer in Compromise Requirements

Preliminary Qualifications

To qualify for an Offer in Compromise, individuals must meet specific preliminary qualifications set forth by the IRS. These qualifications include demonstrating an inability to pay the full tax liability within a reasonable time or proving doubt regarding one's actual tax liability.

Importance of Tax Compliance

Another crucial requirement for pursuing an OIC is ensuring compliance with all necessary tax laws and regulations. This involves filing all legally required tax returns before applying for an offer in compromise with the IRS.

By understanding these fundamental aspects, taxpayers can navigate through their options when faced with overwhelming tax liabilities and financial constraints.

Preparing Your Offer in Compromise Application

Once a taxpayer decides to pursue an Offer in Compromise (OIC), the next crucial step is to prepare the necessary documentation and forms for the application process. This involves gathering essential paperwork, calculating the offer amount, and potentially seeking professional assistance.

Required Documentation and Forms

Essential Forms for Filing an Offer in Compromise

Filing an Offer in Compromise with the IRS requires specific forms that must be completed accurately. The primary form is Form 656, which serves as the official application for an OIC. Additionally, taxpayers need to submit a detailed financial statement using Form 433-A (OIC) for individuals or Form 433-B (OIC) for businesses. These forms provide comprehensive information about the taxpayer's financial situation, including assets, income, expenses, and liabilities.

Organizing Financial Information

Organizing financial information is a critical aspect of preparing an Offer in Compromise application. Taxpayers should gather documentation related to their income, such as pay stubs, profit and loss statements for businesses, and any other sources of revenue. Additionally, they need to compile details about their expenses, including rent or mortgage payments, utilities, and other necessary living costs. Detailed records of assets such as real estate holdings, vehicles, bank accounts, and investments are also essential for this process.

Calculating Your Offer Amount

Assessing Your Tax Liability

When calculating the offer amount for an Offer in Compromise, taxpayers must assess their total tax liability accurately. This involves reviewing all outstanding tax debts owed to the IRS and ensuring that these amounts are correctly documented.

Evaluating Your Ability to Pay

Another crucial factor in determining the offer amount is evaluating one's ability to pay based on their current financial situation. This assessment considers factors such as income level, monthly expenses, asset equity, and overall financial stability.

Seeking Professional Assistance

The Role of a Tax Attorney in the Application Process

Given the complexity of the OIC application process and the importance of accurate financial representation, many taxpayers opt to seek professional assistance from a qualified tax attorney. A tax attorney can provide valuable guidance throughout the application process by ensuring that all required forms are completed accurately and that the taxpayer's best interests are represented effectively.

By understanding these key steps involved in preparing an Offer in Compromise application, taxpayers can navigate through this process with greater confidence while maximizing their chances of success.

Submitting Your Offer in Compromise

Once the Offer in Compromise (OIC) application is meticulously prepared, the next critical phase involves the submission process and managing communication with the Internal Revenue Service (IRS). Understanding how to submit the offer and effectively communicate with the IRS can significantly impact the success of the application.

The Submission Process

How to Submit Your Offer

When submitting an Offer in Compromise to the IRS, taxpayers have several options for delivery. The preferred method is to send the completed application forms and all required documentation via certified mail to the appropriate IRS office. Additionally, individuals can choose to hand-deliver their offer package directly to their local IRS office. It is essential to retain proof of mailing or delivery for reference purposes.

Paying the Application Fee and Initial Payment

Upon submitting an OIC, applicants are required to pay a non-refundable application fee unless they qualify for a waiver based on low income. Furthermore, a portion of the initial payment accompanying the offer must be submitted along with the application. This initial payment amount varies depending on whether individuals choose a lump sum cash offer or periodic payment offer.

Managing IRS Communication

Responding to IRS Requests for More Information

Throughout the review process, it is common for the IRS to request additional information or clarification regarding elements of the Offer in Compromise application. Taxpayers must promptly respond to these requests by providing comprehensive and accurate details as requested. Failure to do so could result in delays or potential rejection of the offer.

The Importance of Timely Communication

Maintaining open and timely communication with the IRS during this process is crucial. Responding promptly to any inquiries or requests from IRS representatives demonstrates cooperation and commitment, which can positively influence their assessment of your case.

By understanding and following these steps involved in submitting an Offer in Compromise and effectively managing communication with the IRS, individuals can navigate through this phase with confidence while maximizing their chances of success.

After Submitting Your Offer: What to Expect

Once the Offer in Compromise (OIC) application has been submitted to the Internal Revenue Service (IRS), taxpayers enter a crucial phase where they await the IRS review and decision. Understanding the review process and potential outcomes, including acceptance or rejection of the offer, is essential for individuals navigating through this stage.

IRS Review and Decision

The Review Process

After submitting an Offer in Compromise, the IRS initiates a thorough review of the application and all accompanying documentation. This review process involves assessing the taxpayer's financial situation, evaluating the accuracy of the information provided, and determining whether the offer meets the necessary criteria for acceptance.

Understanding Potential Outcomes

Following the review process, there are two primary potential outcomes for an Offer in Compromise:

Acceptance: If the IRS accepts the offer, it signifies that they agree to settle the taxpayer's tax debt for less than the full amount owed. This decision provides individuals with an opportunity to resolve their tax liabilities through a negotiated agreement with specific terms and conditions.
Rejection: Conversely, if the IRS rejects an OIC, it means that they have determined that the offer does not meet their acceptance criteria. In such cases, taxpayers must understand why their offer was rejected and explore options for appealing this decision.

If Your Offer is Accepted

Completing Payment

If the IRS accepts your offer, you will be required to fulfill your agreed-upon payment obligations promptly. This typically involves making either a lump sum payment or periodic payments as outlined in your accepted offer agreement.

Removing a Federal Tax Lien

Upon completing payment as per your accepted Offer in Compromise, it is possible to apply to have any existing federal tax liens removed. While this may not occur automatically, successful completion of an accepted OIC can lead to relief from federal tax liens associated with your resolved tax debt.

If Your Offer is Rejected

Reasons for Rejection

In cases where the IRS rejects an OIC, it is crucial for taxpayers to understand why their offer was not accepted. Common reasons for rejection include inaccuracies or omissions in financial disclosures, failure to comply with requested documentation or information, or doubts regarding whether accepting the offer would truly be in the government's best interest.

The Appeal Process

If your Offer in Compromise is rejected by the IRS, you have options to appeal this decision. The appeal process involves submitting a formal request for reconsideration along with any additional supporting documentation that addresses concerns raised during the initial review. Engaging in this process allows individuals to present their case more comprehensively and potentially achieve a different outcome.

By understanding these post-submission phases of an Offer in Compromise, taxpayers can prepare themselves for potential outcomes while remaining informed about next steps following acceptance or rejection of their offers.

Final Thoughts

After successfully navigating the intricate process of an Offer in Compromise (OIC), individuals can experience significant long-term benefits that extend beyond immediate tax relief. Understanding these advantages is crucial for taxpayers seeking to achieve financial stability and compliance with tax obligations.

The Long Run Benefits of an Offer in Compromise

Financial Relief and Fresh Start

An accepted Offer in Compromise provides individuals with much-needed financial relief by allowing them to settle their tax debts for less than the full amount owed. This reduction in tax liability can alleviate the burden of overwhelming debt and create a pathway towards a fresh start. By resolving their tax obligations through an OIC, taxpayers can regain control of their finances and work towards rebuilding their economic well-being.

Maintaining Future Tax Compliance

One of the lasting benefits of pursuing an Offer in Compromise is the opportunity it presents for individuals to maintain future tax compliance. By addressing outstanding tax liabilities through this program, taxpayers can establish a foundation for adhering to their tax responsibilities moving forward. This commitment to compliance not only fosters a positive relationship with the IRS but also contributes to long-term financial stability and peace of mind.

As individuals reflect on the potential outcomes of an Offer in Compromise, they should consider these enduring benefits that extend well into the future. Achieving financial relief and establishing a commitment to ongoing tax compliance are essential components of leveraging the opportunities presented by an OIC.

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Attorney Orlando R. Dizon | Tax Resolution, Esq | Houston Tax Resolution Attorneys