M&M Financial provides free tax guides on its website. Here is the information contained in the IRS Offer in Compromise guide. Click here to request the following free tax guides.
• IRS Tax Liens
• Penalty Abatement
• Offer in Compromise
• IRS Levy and Garnishment
• IRS Installment Agreement
Offer in Compromise (OIC)
The Offer in Compromise is a government tax debt resolution program that allows a delinquent taxpayer to settle a tax liability for less than the full amount owed. If you don’t have the ability to pay your total tax debt through monthly payments, if paying the tax debt will cause you to suffer a financial hardship, or if you don’t believe you owe the tax debt, you may qualify for the OIC.
If you do not have equity in assets and do not show the ability to make monthly payments (considering the IRS Collection Financial Standards), you may be a good candidate for the OIC. It is a long and challenging process that typically takes between six months and two years to complete. Keep in mind that you may also be a good candidate for Currently Not Collectible status or a monthly Installment Agreement.
The OIC may also be the most misunderstood IRS tax debt resolution program. Thanks largely to advertisements on TV and radio, the Offer is made to sound like a simple handshake agreement. In reality, the Offer can be complicated, time consuming and difficult to achieve. An OIC can be based on Doubt as to Collectibility and/or Doubt as to Liability. The Doubt as to Collectibility OIC is based on an inability to pay the entire tax liability from assets and income over the next 24 months. A Doubt as to Liability Offer is possible where there is a legitimate question as to the validity of the assessed tax liability.
A great place to start the process of determining whether or not you qualify to submit an IRS Offer in Compromise is online here.
IRS Form 433-A (OIC)
To request your IRS OIC, you will need to complete an IRS Collection Information Statement (CIS), form 433-A (OIC) for individuals. Businesses must also submit form 433-B (OIC). The IRS uses the CIS forms to determine your equity in assets, such as your car, home, retirement, business equipment, Accounts Receivable and so on, as well as your monthly income and expenses to determine your ability to pay monthly and the amount that must be offered. As a result, these forms are very, very important.
The IRS will use the information on the forms and the substantiation you provide to verify that your Offer amount is more than they can collect through other available IRS collection options. You must take great care in completing form 433-A (OIC) and 433-B (OIC).
Business owners with a 941 payroll tax liability must take the Trust Fund Recovery Penalty (TFRP) into consideration when preparing their business OIC. It has a direct impact on how the IRS handles employment tax cases. The TFRP should also be a determining factor in how business owners resolve their 941 payroll tax debts.
OIC Payment Options
You have two basic choices to pay your Offer amount. Lump Sum Cash and Periodic Payments. All payments to the IRS while your OIC is being reviewed are non-refundable.
Lump Sum Cash – requires 20% of your total Offer amount to be paid with your submitted OIC and the remaining balance to be paid in five or fewer payments within 5 months of your OIC acceptance date. The Lump Sum Cash option allows you to calculate your Future Remaining Income over 12 months instead of 24, which may be highly beneficial in lowering your offer amount.
Periodic Payments – If you will pay your offer in more than 5 months and less than 24 months, you must make monthly payments while your OIC is under review, with your first payment submitted to the IRS with your OIC. The Periodic Payment option requires you to calculate your Future Remaining Income over 24 months, while the Lump Sum Cash option allows it to be calculated over just 12 months.
Your OIC Application
The OIC application fee is $186 and must be submitted with your Offer along with your initial payment toward your Offer amount. Make your Offer payments payable to “United States Treasury” and in the memo portion of your payment write your tax identification number, Offer Number (once assigned by IRS) and “OIC – Form 656”. When the IRS acknowledges your Offer is pending, they will assign an Offer Number to your OIC case. It will be on IRS correspondence concerning your Offer throughout the review process.
Here are the items you must submit in your OIC package to the IRS.
- Form 656, Offer in Compromise
- Completed Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals, if applicable
- Completed Form 433-B (OIC), Collection Information Statement for Businesses, if applicable
- $186 application Fee, unless you meet Low Income Certification
- Initial offer payment, unless you meet Low Income Certification
*Above list taken from IRS form 656 revised 01.2014
Additional Information about the OIC
Record Keeping – Keep a copy of the OIC package you initially submit to the IRS for your records. Keep copies of your monthly expenses, bills, invoices, bank statements, cancelled checks, paystubs, electronic payments… from the time you submit your OIC until it is accepted or rejected in writing.
Acceptance and Rejection – Remember that the IRS cannot verbally accept or reject your OIC. Do not consider your OIC accepted until the IRS provides it to you in writing.
Maintain your OIC – After written acceptance of your OIC by the IRS, you must pay your Offer amount timely according to the payment terms outlined in your acceptance letter. The IRS also requires you to file and pay all required taxes for five tax years after acceptance. The IRS will also retain any refunds that you may be entitled to receive for the tax year in which your offer has been accepted and for earlier tax years. Refunds taken by the IRS will not be considered payments toward your OIC.