Offers in Compromise: Options, Benefits and the Process

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Taxpayers unable to satisfy an outstanding tax debt may reduce their tax liabilities through an offer in compromise (OIC). OICs are offered through the IRS and are similar to other debt settlement programs. The taxpayer, assuming they qualify, may settle their tax liability for a fraction of what they owe. Offers in compromise may also be used to dispute an outstanding tax debt and, if successful, discharge the liability completely. A reputable Houston tax attorney can help.

Offers in compromise are not automatically accepted by the IRS. Far from it, in fact. The majority of OIC applications are rejected by the agency, so it’s critically important for applicants to provide accurate, detailed information to the IRS to support an OIC case.

Why Should Taxpayers Consider Making an Offer in Compromise?

Although the IRS rejects most OIC applications, it’s still worth pursuing for taxpayers who cannot afford their tax bill or are facing financial hardship. Here is why:

• An OIC can reduce tax burdens – Clearly, the main reason why taxpayers apply for an OIC is because they cannot afford their outstanding taxes. If the taxpayer’s circumstances are such that the IRS doesn’t believe it can recoup the full tax bill, an offer in compromise provides taxpayers a relatively quick way to resolve their debts. For some, the reduction can be massive, but again, most OIC applications are rejected. This high rejection rate is a good reason to partner with a tax professional beforehand.

• An OIC gives taxpayers additional payment options – When submitting an OIC, taxpayers may elect to pay their offer in a lump sum arrangement or with a monthly installment agreement. Lump sums must be paid within five months (paid monthly) while monthly plans are paid out over 24 months. If paying in a lump sum, monthly payments will be considerably higher (the IRS applies a multiplier to lump sum monthly payments), so for applicants, it’s a matter of paying more over a short period of time, or less over a longer stretch. The optimal decision will vary with the situation.

• An OIC allows taxpayers to move on with their life – It’s not exactly pleasant embarking on an IRS payment plan, but it does resolve any tax-related anxieties. It also allows taxpayers to make major life decisions without worrying about the tax implications. Marriage, for example, may be put off to avoid exposing the future spouse to tax liability. By working with the IRS on an OIC, taxpayers can focus on important areas of their life without worry.

Three Options for Filing an Offer in Compromise

An OIC may be submitted for one of three reasons, and all three require completion of some version of Form 656. The options include:

• Inability to pay outstanding tax liabilities – The most common reason for filing an OIC is because the applicant does not have the income or assets to resolve their tax bill. The taxpayer agrees that they owe the tax but asserts that they do not have the ability to pay.

  The IRS will accept this reason if it doubts that it can recoup the full amount. However, this is not completely subjective. The IRS will review the applicant’s financial information to verify that, indeed, the applicant is highly unlikely to resolve their account in full. This is confirmed through supplemental worksheets (either Form 433-A or Form 433-B) used to calculate payments, along with supporting documentation.

• Doubt as to whether a tax liability is valid – An OIC may also be filed if the taxpayer believes they do not owe the tax, or that the tax is not theirs to pay. To submit an offer in compromise for this reason, the applicant must complete Form 656-L. Form 433-A or 433-B are not required with 656-L, but supporting tax documentation (tax returns, typically) and a written statement describing why the tax shouldn’t apply must be included.

• Undue hardship making collection unacceptably difficult – In rare cases, taxpayers may claim special hardship in their OIC application. This hardship should be such that it is not in the interest of the IRS to pursue collection. For example, if the taxpayer has been diagnosed with a terminal illness and is using assets to pay for medical care, it may be prohibitively difficult to recoup outstanding taxes. This option is only available in a vanishingly small number of circumstances, and commonplace financial hardship does not qualify.

Along with Form 656 and supplemental forms, the applicant must send a $205 application fee along with their application. This fee may be waived for low-income taxpayers. Also, the first OIC payment must be sent as well if the OIC isn’t disputing a tax liability. This initial payment must be calculated relative to what the taxpayer owes and whether they plan on paying a lump sum or in monthly installments.

What to Expect While Filing for an Offer in Compromise

There’s a good deal of information gathering and waiting when putting together an OIC application. If you’re considering an offer in compromise, here’s how the process usually unfolds:

• Ensuring all qualifications are met – Before an OIC application can be submitted, the applicant must meet several criteria. To qualify, the applicant must be current on their tax returns (no outstanding returns). They must also have received a tax bill from the IRS, must have made all estimated tax payments for the current tax year, and must not be involved in bankruptcy proceedings. If any of the above are not true, the OIC will be rejected without review and the application fee (and initial payment) will not be returned.

• Gathering all financial information – For most applicants, a wealth of information will need to be provided with the offer in compromise application. This should include information about income, assets, investments, expenses and debts. Additional information about your household income and expenses – utilities, food, rent, insurance – must also be provided. The IRS will use this information to determine the applicant’s share of household expenses and their disposable income.

• Completing the relevant forms – Form 656 or 656-L are OIC application forms and are required to begin the process. If the outstanding tax liability is acknowledged by the applicant, they must also submit either Form 433-A (for individuals) or Form 433-B (for businesses) for payment calculation purposes. If the outstanding liability concerns the taxpayer’s individual return and a business return (for a business they own), both forms must be provided, along with separate application fees and initial payments.

• Submitting the application and waiting for a response – The IRS is not known for speed, and that’s the case with offers in compromise applications, too. It typically takes several months before the IRS will make its decision. During this time, the taxpayer must continue submitting monthly tax payments to the IRS.

• (Potentially) appealing if the application is rejected – If the OIC is rejected, applicants have 30 days from the date specified on the rejection letter to file an appeal. This is done through Form 13711, or the taxpayer may mail a letter to the agency explaining their situation in greater detail.

If the OIC is accepted, you’ll need to continue making payments under the agreement set forth in the compromise. Depending on your choice of payment structure, this means satisfying the reduced payment amount within five months (lump sum option) or in monthly installments within 24 months.

How a Houston Tax Law Expert Can Help with Offers in Compromise

Working with the IRS over an existing tax debt is understandably intimidating for most people. If the process isn’t managed properly, applicants may be disqualified from the program before they are considered, and they will lose their initial payment in the process.

The stakes are high, and confusion is common with offers in compromise, but a tax lawyer can make sense of it for their clients. A Houston tax attorney, for example, can provide expert guidance regarding how to maximize approval chances, what information to provide (and how to attain it), and proper form completion. If the liability is to be disputed, a tax lawyer can also help their client gather evidence to that fact and represent it effectively to the IRS.

If approved, offers in compromise can provide major tax relief to people. Attaining approval, though, can be a challenge. A Houston tax attorney can help their clients take on this challenge and maximize their chances of securing an OIC.

By Harold "Hap" May, P.C. on November 17, 2023   /   Blog, The Legal Play Podcast   /   Leave a comment