Settling up with the IRS: 3 things to know about an offer in compromise (OIC)
It’s an anxious feeling, knowing you don’t have enough money to pay your taxes.
After all, if you don’t get the debt taken care of, the IRS could take collection action against you. They could put a lien on your house, freeze your bank account or garnish your wages.
Even if you can’t pay the full amount right away, however, you still have options. In this post, we will highlight three things to know one of them: making an offer in compromise (OIC).
Start by educating yourself.
There are other options besides an OIC for addressing tax debt. For example, you can enter into an installment agreement to make monthly payments for a period of up to 60 months.
But an OIC is the only option that can enable you to settle up with the IRS for less than the full amount you owe. If you are interesting in pursuing this path, it makes sense to find out whether you are eligible.
The eligibility requirements for an OIC also include being current on your tax filing obligations. Keep in mind also that if you are currently in the bankruptcy process, that will keep you from being eligible for applying for an OIC.
There is also an online prequalified tool to help you gauge your eligibility.
And so the first thing to do, when considering an OIC, is to educate yourself about the program.
You need to negotiate.
There are three circumstances in which the IRS is authorized to enter into an OIC. One is when there is doubt about the tax liability. The others are when there is doubt as to collectability or collection would impose an undue hardship
Before the IRS decides whether to accept your offer, it will analyze the reasonable collection potential of your debt.
In recent years, the IRS has liberalized the rules on what how much of your assets and future income must go toward paying tax debt. As a result, the acceptance rate has gone up in recent years.
But the IRS does not have to accept your offer. Section 7122 of the Internal Revenue Code gives the IRS a lot of discretion there.
That’s why it’s important to negotiate effectively with the IRS. This involves showing the IRS your financial challenges and convincing them that they can’t realistically get any more money out of you than you are offering to pay in the OIC.
A knowledgeable tax attorney can handle these negations for you and help you seek the best settlement for your situation.
Documentation is important.
When making an OIC, it’s important to keep good records of your expenses. This will help you show the IRS that your expenses are reasonable
You will also need detailed information to support your offer when you make it. This documentation will go along with application materials specified in Form 656-B, also called the Offer in Compromise Booklet.