We’re all responsible for paying our fair share of taxes each year. But what happens when the amount you owe is simply out of reach? If your financial circumstances have shifted to the point where your cumulative debt is beyond your ability to pay, your best option for dealing with the IRS may be an Offer in Compromise (OIC).
The Goal of the Offer in Compromise
The Offer in Compromise, or OIC, was created to accomplish two goals:
- ✅ It allows American taxpayers who are unable to pay the full amount of their tax debt a way to negotiate a payment that aligns with their ability to pay.
- ✅ It provides the IRS with the ability to collect at least a portion of the amount owed to them.
The process is neither simple nor fast—it generally takes one to two years for both sides to agree on an amount to be paid. Even so, it has certain advantages for both sides.
An Offer in Compromise generally allows for a resolution to be accomplished outside of court, with the agreed-to payment reflective of income and assets rather than the actual amount of debt that has accrued. Though it may seem a loss for the IRS, the agency often recovers more through settling than they might through aggressive collection efforts.
Understanding the Available Offer in Compromise Options
Taxpayers interested in pursuing an Offer in Compromise generally have three different options available to them under federal law:
- 💡 Question the Debt: You can argue that you don’t owe the tax debt.
- 💡 Inability to Pay: You can show that your assets and income aren’t enough to cover the debt.
- 💡 Exceptional Circumstances: You can seek a compromise based on economic hardship or special circumstances, even if you owe the full amount. This falls under the category of “effective tax administration.”
🚩 Applying for an Offer in Compromise
The OIC process is both time-consuming and complicated. Applications require specific forms as well as extensive documentation, and all must be accurately prepared in keeping with IRS regulations. When mistakes are made or forms are incomplete, the applications are quickly returned without the benefit of a review. To minimize both delay and frustration, it is strongly suggested that taxpayers looking to avail themselves of an OIC employ tax professionals for both the preparation of their paperwork and the negotiation of its terms.
🚩 Not Every OIC Application is Approved
It is also important to remember that an application for an OIC by no means guarantees the desired outcome.
🚩 Use a Qualified Tax Professional
Submitting the specifics of your situation to a qualified tax professional will provide you with the ability to have your case reviewed by an expert who understands the process and the IRS criteria for approval, and who will be able to give you a reasoned perspective on the viability of your request.
Working with a professional will also provide you with reasonable expectations regarding the amount of time that the process will take and what your chances are of having your initial offer accepted. The program generally takes about two years from start to finish, and it is common for the IRS to make a counteroffer when the agency believes it will be able to collect more than the amount proffered by the applicant.
❓ How Much the Taxpayer is Able to Pay
In evaluating your case, the Internal Revenue Service will likely pay less attention to the actual amount that is owed than the amount that the taxpayer is able to pay. This determination will be made on the basis of numerous factors, including income, assets, previous earnings capacity, and anticipation of your earnings capacity in the future. Living expenses will also be taken into consideration.
💡 The Good News
The good news is that from the time that an application is sent in and while an IRS evaluation is taking place, most collection efforts are frozen. This generally provides tremendous relief from stress for taxpayers who have fallen behind in their payments and who feel unable to submit the amount that they owe.
Take the Next Step—Consult a Tax Expert Today
If you’re considering an Offer in Compromise, navigating this complex process on your own can be overwhelming. Contact us today to discuss your situation with a knowledgeable tax professional.
We’ll help you understand every step of the OIC process, prepare your application with precision, and advocate on your behalf during negotiations. Let’s work together to find the tax relief you need in 2024.