IRS Tax Debt Relief: An Overview of the Offer in Compromise Program

If you owe taxes to the IRS and you are struggling to pay them, you may be wondering if there is any way to settle your tax debt for less than the full amount you owe. The answer is yes, there is a program called the Offer in Compromise (OIC) that can help you resolve your tax debt with the IRS. In this article, we will explain what the OIC program is, who is eligible for it, how to apply for it, and what are some of the benefits and drawbacks of using it.

What is an Offer in Compromise?

An Offer in Compromise is an agreement between you and the IRS that allows you to pay a reduced amount of your tax debt over time. The IRS will consider your ability to pay, your income, expenses, assets, and other factors before deciding whether to accept or reject your offer. The goal of an OIC is to reach a compromise that is fair and reasonable for both parties.

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Who Is Eligible for an Offer in Compromise?

You may be eligible for an OIC if you meet all of the following criteria:

• You filed all required tax returns and made all required estimated payments
• You are not in an open bankruptcy proceeding
• You have a valid extension for a current year return (if applying for the current year)
• You are an employer and made tax deposits for the current and past 2 quarters before you apply

If you are not sure whether you qualify for an OIC, you can use the Offer in Compromise Pre-Qualifier Tool on the IRS website to get a preliminary estimate of your eligibility.

How to Apply for an Offer in Compromise?

To apply for an OIC, you need to complete an application package that includes:

• Form 433-A (OIC) (individuals) or 433-B (OIC) (businesses)
• All required documentation as specified on the forms
• Form 656(s) – you must submit individual and business tax debt (Corporation/ LLC/ Partnership) on separate Forms 656
• $205 application fee (non-refundable)
• Initial payment (non-refundable) for each Form 656

You can find forms and instructions on how to submit your application package on Form 656-B, Offer in Compromise Booklet PDF.

What Are Some of the Benefits of Using an Offer in Compromise?

An OIC can offer some benefits for taxpayers who cannot pay their full tax liability or who face financial hardship due to COVID-19 or other reasons. Some of these benefits are:

• You can reduce your tax debt by up to 70% or more
• You can avoid late payment penalties, interest charges, collection actions, liens, levies, garnishments, seizures of property or bank accounts
• You can improve your credit score by paying off your tax debt
• You can have more time to pay off your tax debt by choosing a payment plan that suits your budget

What Are Some of the Drawbacks of Using an Offer in Compromise?

An OIC also has some drawbacks that taxpayers should be aware of before applying. Some of these drawbacks are:

• You need to provide sufficient documentation and information about your income, expenses, assets, liabilities, dependents, etc.
• You need to meet certain financial criteria based on your income level and family size
• You need to pay a non-refundable application fee and initial payment that may increase your total tax liability
• You need to make regular payments until your offer is approved or rejected by the IRS
• Your offer may be rejected if it does not represent a reasonable collection potential or if it violates any laws or regulations

Conclusion

An OIC can be a viable option for taxpayers who cannot pay their full tax liability or who face financial hardship due to COVID-19 or other reasons. However, it is not a guarantee that your offer will be accepted by the IRS. Therefore, it is important that you carefully evaluate your situation and explore all other payment options before applying for an OIC. If you decide to apply for an OIC, make sure that you follow all the steps correctly and provide accurate and complete information about yourself and your finances.

Frequently Asked Questions

How long does it take to process my offer?

The processing time varies depending on several factors such as how complex your case is, how much documentation you provide, how busy the IRS office handling your case is etc. Generally speaking, it may take anywhere from 3 months to several years. If there are any issues with verifying information, reviewing evidence, negotiating terms, etc., it may take longer.

How can I withdraw money from my IRA without paying taxes or penalties?

You may be able to withdraw up to $100,000 from your IRA before December 31, 2020, if you meet certain criteria related to COVID-19. These criteria include being diagnosed with the virus or having a spouse or dependent who is diagnosed with the virus, experiencing adverse financial consequences due to COVID-19, or having a qualified disaster. You can choose to have the withdrawal included in taxable income over three years or in the year taken. You also do not have to pay the 10% additional tax on early distributions that normally applies to most withdrawals before age 59½.

How can I apply for an Offer in Compromise if I have an IRA?

An Offer in Compromise is an agreement between you and the IRS that allows you to settle your tax debt for less than the full amount you owe. You can apply for an Offer in Compromise if you have an IRA, as long as you meet all of the eligibility criteria for the program. You need to complete an application package that includes Form 433-A (OIC) (individuals) or 433-B (OIC) (businesses), all required documentation, Form 656(s), and a $205 application fee and an initial payment. You can find forms and instructions on how to submit your application package on Form 656-B, Offer in Compromise Booklet PDF.

How can I get more time to pay my tax debt if I have an IRA?

If you have an IRA and you are unable to pay your tax debt in full by the due date, you may be able to request a short-term payment plan option from the IRS. This option allows you to pay your tax debt over up to three years without interest or late fees. However, this option is not available for all types of tax debts and it does not reduce your tax liability. To request this option, you need to contact the number on your balance due notice or respond in writing within 30 days of receiving it.