How to Determine If You Qualify for an IRS Offer In Compromise

Orlando R. Dizon

·April 30, 2024

·9 min read

How to Determine If You Qualify for an IRS Offer In Compromise — Image Source: pexels

Understanding the IRS Offer in Compromise

What is an Offer in Compromise?

An Offer in Compromise (OIC) is a program offered by the Internal Revenue Service (IRS) that allows taxpayers to settle their tax debts for less than the full amount owed. The primary purpose of this program is to provide a fresh start to financially distressed taxpayers by offering them a realistic opportunity to pay off their tax liabilities and get a clean slate with the IRS.

Definition and Purpose

The OIC serves as a potential lifeline for individuals or businesses struggling with overwhelming tax debt. It provides an avenue for qualifying taxpayers to negotiate a settlement amount that is feasible for them to pay, considering their financial situation. By accepting an OIC, the IRS agrees to forgive the remaining tax debt, providing significant relief to eligible taxpayers.

How It Can Help Taxpayers

The OIC can be immensely beneficial for taxpayers facing severe financial hardship or those whose tax debt far exceeds their ability to pay. It offers them a chance to resolve their tax issues without experiencing extreme financial strain, allowing them to regain control of their finances and move forward with a clean slate.

The Acceptance Rate of OICs

The acceptance rate for Offers in Compromise (OICs) is not particularly high, making it crucial for applicants to understand the factors influencing acceptance and the importance of submitting a well-prepared application.

Factors Influencing Acceptance

Several factors influence the acceptance of an OIC, including the accuracy and completeness of the application, the taxpayer's compliance history, and their current financial situation. Understanding these factors is essential for increasing the likelihood of approval.

Importance of a Well-Prepared Application

A well-prepared OIC application significantly enhances the chances of acceptance. It involves thorough documentation, accurate financial statements, and a carefully calculated offer amount based on the taxpayer's reasonable collection potential (RCP). Failing to submit a comprehensive application can lead to rejection, prolonging the resolution process for taxpayers already burdened by tax debt.

Do You Qualify For An IRS Offer In Compromise?

When determining eligibility for an IRS Offer in Compromise (OIC), there are specific mandatory requirements that all applicants must meet. Additionally, understanding the concept of Reasonable Collection Potential (RCP) is crucial in assessing one's qualification for this program.

Mandatory Requirements for All Applicants

Filing All Tax Returns

To qualify for an OIC, taxpayers must ensure they have filed all their tax returns as per the IRS regulations. This requirement demonstrates a commitment to fulfilling their tax obligations and is a fundamental step in the application process.

Making Required Payments and Deposits

Another essential prerequisite is making all required payments and deposits. This includes staying current with estimated tax payments or withholding and, if applicable, ensuring that all federal tax deposits have been made. Adhering to these payment obligations showcases financial responsibility and compliance with IRS guidelines.

Calculating Your Reasonable Collection Potential (RCP)

Understanding RCP

The Reasonable Collection Potential (RCP) refers to the total amount the IRS reasonably expects to collect from a taxpayer within a specific timeframe. It takes into account the taxpayer's assets, income, and allowable expenses. Understanding how the IRS calculates this potential collection amount is vital in determining one's eligibility for an OIC.

How RCP Affects Your Qualification

The RCP plays a pivotal role in determining whether a taxpayer qualifies for an OIC. The IRS evaluates the proposed offer amount against the calculated RCP. If the offer amount falls short of the RCP, it is unlikely to be accepted. Therefore, comprehending how the RCP affects qualification is essential when considering an OIC application.

Preparing Your Offer in Compromise Application

Once it has been determined that a taxpayer meets the eligibility requirements for an IRS Offer in Compromise (OIC), the next crucial step is to prepare a comprehensive application. This involves gathering necessary documentation and proposing a reasonable payment offer that aligns with the taxpayer's financial situation.

Gathering Necessary Documentation

Financial Statements

When preparing an Offer in Compromise application, taxpayers must compile detailed financial statements that provide a clear overview of their assets, liabilities, and overall financial standing. These statements should include information about bank accounts, investments, real estate holdings, as well as any outstanding debts or liabilities. Providing accurate and thorough financial statements is essential in demonstrating transparency and cooperation with the IRS.

Proof of Income and Expenses

Accompanying the financial statements should be thorough documentation of taxpayers' income sources and regular expenses. This includes pay stubs, profit and loss statements for business owners, rental income records, and any other sources of revenue. Additionally, documenting essential living expenses such as housing costs, utilities, transportation, and healthcare expenditures is vital in painting a comprehensive picture of the taxpayer's financial situation.

Proposing a Payment Offer

Determining a Reasonable Offer

When proposing an offer amount to settle tax debt through an OIC, it is crucial for taxpayers to carefully assess their financial capabilities. The offer amount should reflect what they can realistically afford to pay based on their current income, assets, and allowable expenses. It's important to strike a balance between offering a substantial amount to demonstrate commitment while ensuring that it remains feasible within their financial means.

Payment Options Available

The IRS offers various payment options for taxpayers submitting an Offer in Compromise. These options include lump-sum cash payments or periodic payment plans spread over several months. Understanding these options allows taxpayers to choose the most suitable payment method based on their financial circumstances.

Lump-sum cash payments
Periodic payment plans

After Submitting Your Offer in Compromise

The Review Process

Once the Offer in Compromise (OIC) application has been submitted to the IRS, it undergoes a thorough review process to determine its acceptance or rejection.

What Happens After Submission

After submitting the OIC application, the IRS conducts an initial review to ensure that all required documentation and forms have been accurately completed and included. This stage involves verifying the accuracy of financial statements, proof of income and expenses, and the proposed offer amount. The application is then assigned to an IRS agent for further evaluation.

Timeline for Decision

The timeline for a decision on an OIC application can vary based on the complexity of the case and current IRS processing times. Generally, applicants can expect to receive a response within several months after submission. However, it's important to note that this timeline is approximate, and certain cases may require additional time for thorough assessment.

If Your Offer is Accepted

Next Steps and Obligations

If the IRS accepts an Offer in Compromise, taxpayers must fulfill specific obligations outlined by the IRS. These typically include adhering to all tax laws and filing requirements for a specified period following acceptance. Additionally, any agreed-upon settlement amount must be paid promptly according to the terms established in the OIC agreement.

Maintaining Compliance

Maintaining compliance with tax laws and regulations is crucial after an OIC is accepted. This entails timely filing of all future tax returns and making any required estimated tax payments or federal tax deposits if applicable. Failure to comply with these obligations could result in serious consequences, including revocation of the OIC agreement.

If Your Offer is Rejected

Understanding the Reasons

In cases where an OIC application is rejected, it's essential for taxpayers to understand the reasons behind the decision. Common reasons for rejection may include inaccuracies in financial documentation, insufficient offer amount relative to reasonable collection potential (RCP), or failure to meet mandatory filing and payment requirements.

Options for Reapplication or Appeal

Upon receiving a rejection notice from the IRS, taxpayers have options to consider moving forward. They can choose to reapply for an OIC with updated or corrected information addressing previous deficiencies. Alternatively, they may opt to appeal the rejection decision through formal channels provided by the IRS.

Conclusion

Recap of Key Points

In conclusion, understanding the intricacies of the IRS Offer in Compromise (OIC) is crucial for taxpayers facing overwhelming tax debts. Here are the key points to remember:

An OIC allows taxpayers to settle their tax debts for less than the full amount owed, providing a fresh start for financially distressed individuals and businesses.
The acceptance rate for OICs is relatively low, making it essential to comprehend the factors influencing acceptance and submit a well-prepared application.
Mandatory requirements for all OIC applicants include filing all tax returns and making required payments and deposits, showcasing financial responsibility and compliance with IRS guidelines.
Calculating the Reasonable Collection Potential (RCP) is vital in assessing one's qualification for an OIC, as it determines the total amount the IRS reasonably expects to collect from a taxpayer.

Encouragement to Seek Professional Advice

Navigating the complexities of an IRS Offer in Compromise can be challenging, and seeking professional advice is highly encouraged. Taxpayers should consider consulting with qualified tax professionals or enrolled agents who specialize in resolving tax issues. These professionals can provide invaluable guidance throughout the OIC application process, ensuring that taxpayers are well-equipped to present a compelling case to the IRS.

Seeking professional advice not only enhances the likelihood of a successful OIC application but also offers peace of mind by having professionals navigate the intricate procedures on behalf of taxpayers. With their experienced taxpayers can approach an OIC with confidence, knowing that they have comprehensive support in pursuing a favorable resolution with the IRS.

By seeking professional assistance, taxpayers can gain clarity on their eligibility for an OIC, receive tailored guidance on preparing a robust application, and effectively address any challenges that may arise during the review process. Ultimately, professional advice empowers taxpayers to make informed decisions regarding their tax debt and pursue viable solutions through programs like the Offer in Compromise.

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