12/30/2021
Tax Topic: Offer in Compromise
Can't pay your IRS bill. Get with you tax professional to see if you qualify for an OIC.
An offer in compromise (OIC) is an agreement between a taxpayer and the Internal Revenue Service that settles a taxpayer's tax liabilities for less than the full amount owed. Taxpayers who can fully pay the liabilities through an installment agreement or other means, generally won't qualify for an OIC in most cases. For information concerning tax payment options including installment agreements, refer to Topic No. 202. To qualify for an OIC, the taxpayer must have filed all tax returns, made all required estimated tax payments for the current year, and made all required federal tax deposits for the current quarter if the taxpayer is a business owner with employees.
In most cases, the IRS won't accept an OIC unless the amount offered by a taxpayer is equal to or greater than the reasonable collection potential (RCP). The RCP is how the IRS measures the taxpayer's ability to pay. The RCP includes the value that can be realized from the taxpayer's assets, such as real property, automobiles, bank accounts, and other property. In addition to property, the RCP also includes anticipated future income less certain amounts allowed for basic living expenses.
Reasons for the Offer
The IRS may accept an OIC based on one of the following reasons:
First, the IRS can accept a compromise if there is doubt as to liability. A compromise meets this criterion only when there's a genuine dispute as to the existence or amount of the correct tax debt under the law.
Second, the IRS can accept a compromise if there is doubt that the amount owed is fully collectible. Doubt as to collectibility exists in any case where the taxpayer's assets and income are less than the full amount of the tax liability.
Third, the IRS can accept a compromise based on effective tax administration. An offer may be accepted based on effective tax administration when there is no doubt that the tax is legally owed and that the full amount owed can be collected, but requiring payment in full would either create an economic hardship or would be unfair and inequitable because of exceptional circumstances.
Forms to Use
When submitting an OIC based on doubt as to collectibility or effective tax administration, taxpayers must use the most current version of Form 656, Offer in Compromise, and also submit Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals, and/or Form 433-B (OIC), Collection Information Statement for Businesses. A taxpayer submitting an OIC based on doubt as to liability must file a Form 656-L, Offer in Compromise (Doubt as to Liability) PDF, instead of Form 656 and Form 433-A (OIC) and/or Form 433-B (OIC). Form 656 and referenced collection information statements are available in the Offer in Compromise Booklet, Form 656-B PDF.
Application Fee
In general, a taxpayer must submit an application fee for the amount stated on Form 656. Don't combine this fee with any other tax payments. However, there are two exceptions to this requirement:
First, no application fee is required if the OIC is based on doubt as to liability.
Second, the fee isn't required if the taxpayer is an individual (not a corporation, partnership, or other entity) who qualifies for the low-income exception. There are two alternative options for qualifying. The first is that the individual’s adjusted gross income, as determined for the most recent taxable year for which such information is available, falls at or below 250 percent of the poverty guidelines published by the Department of Health and Human Services. The second is that the household’s gross monthly income x 12 months falls at or below 250 percent of the poverty guidelines published by the Department of Health and Human Services. For both options, section 1 of Form 656 contains the Low-Income Certification guidelines to assist taxpayers in determining whether they qualify for the low-income exception. A taxpayer who claims the low-income exception should complete section 1 of Form 656 and check the certification box.
For more information click on the link below:
Topic No. 204 Offers in Compromise
