How Do You Settle Tax Debts Through Offer in Compromise

Paying off taxes can be heavy. However, the Internal Revenue Service has a program called Offer in Compromise (OIC), an agreement between the taxpayer and the IRS. It offers payment terms to taxpayers on how they can pay for their remaining tax amounts should they somehow lose the ability to.

In most cases, the IRS will reject an OIC when it is more than the reasonable collection potential (RCP). The RCP measures a taxpayer’s ability to pay and computes the value that can be collected from assets, such as real property, automobiles, bank accounts, and so on. But how does a taxpayer apply for an OIC? Here’s a quick rundown of how the OIC works.

Check Your Eligibility

The IRS will first have to identify if a taxpayer is eligible for the OIC. Their first requirement is to have filed all required tax returns without any required estimated payments. Any initial payment required with the returned application will be applied to reduce balance dues. However, you are automatically ineligible if you are in an ongoing bankruptcy proceeding.

Submit an Application

On the Internal Revenue Services website, someone who wishes to apply for OIC should send an application along with the following documents:

  • Form 433-A (OIC) (individuals) or 433-B (OIC) (businesses) and all required documentation as specified on the forms;
  • Form 656(s) – individual and business tax debt (Corporation/LLC/Partnership) must be submitted on separate Form 656;
  • $205 application fee (non-refundable); and
  • The initial payment (non-refundable) for each Form 656.

Choose a Payment Option

There are two payment options available for the OIC program: lump sum cash and periodic payments. Depending on what you choose, the initial payment will vary based on the taxpayer’s initial offer. 

For lump sum cash, you’ll need an initial payment of 20 percent of the total amount from your application. After a successful payment, you’ll receive a written confirmation. The remaining balance is usually due in five or fewer installments. However, for periodic payments, you’ll need to settle an initial payment with your application. Once accepted, you’ll continue to pay monthly until completed.

Understand the Process

After assessing the application, the IRS will have to verify all the documents submitted and will come up with a decision. Here are some things to remember after submitting the application.

During Evaluation:

  • Your non-refundable payments and fees will be applied to the tax liability (you may designate payments to a specific tax year and tax debt);
  • A Notice of Federal Tax Lien may be filed;
  • Other collection activities are suspended;
  • The legal assessment and collection period is extended;
  • You must make all required payments associated with your offer;
  • You are not required to make payments on an existing installment agreement; and
  • Your offer is automatically accepted if the IRS does not make a determination within two years of the IRS receipt date.

Upon Acceptance:

  • You must meet all the Offer Terms listed in Section 7 of Form 656, including filing all required tax returns and making all payments;
  • Any refunds due within the calendar year in which your offer is accepted will be applied to your tax debt;
  • Federal tax liens are not released until your offer terms are satisfied; and
  • The certain offer information is available for public review by requesting a copy of a public inspection file.

Conclusion

Fleeing from tax responsibilities can be costly. But there are programs offered by the government to allow taxpayers to perform this aspect of their civic duty more comfortably. Offer in Compromise is a great tax relief solution to settle tax debt since it’s flexible and it favors the taxpayer.

Axiom Tax Resolution Group is a team of people dedicated to helping clients resolve their issues with taxes and providing tax resolution. Dealing with the IRS can be stressful and confusing. But leave all your worries to us by contacting us at 844-8-882-9776 or get a free consultation online. Let’s resolve your tax concerns together.