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IRS Offer In Compromise: Pay Less Than The Full Amount of Tax Debt Due Offers, Should I Apply? | Lentax.co

Written by Jamie Williams | May 4, 2022 3:26:31 PM

Should I Apply For An Offer In Compromise?

The short answer is: It depends. You must meet minimum requirements and review a few other considerations.

First, however, what is an offer in compromise? An offer in compromise is a proposal by a taxpayer to the IRS that will settle a tax liability for payment of less than the full amount owed. 

Applying for an Offer In Compromise (OIC) may be the best option when you are looking at federal tax debt over $10,000, you have minimal or no assets, you can afford the $205 application fee, you can complete the application within 30 days, you can pay the payment amounts you have specified in the OIC until your offer is approved (and once it is approved), if other payment options are not in your best interests, and you have time to attend hearings to discuss with the IRS any questions they have related to their OIC evaluation.

Whew, there are a lot of things to consider, but what are the requirements to apply for an OIC?

Here are the minimum requirements to apply for an OIC:

  1. You filed all your required tax returns and make all your required estimated payments
  2. You aren't in an open bankruptcy proceeding
  3. You have a valid extension for a current year return (if you want to include the current tax year with your offer)
  4. You are an employer and made payroll tax deposits for the current and past 2 quarters prior to applying1

Here are a few considerations for applying for an OIC:

  • Consider whether the 30 day administrative hold on collection action will provide you enough time to complete all the necessary forms along with supporting documentation and forward it to the necessary OIC office (Memphis or Holtsville).
  • Consider whether a lien may be filed that may place your personal or business property at risk and can cause other negative consequences. If you apply for an OIC or not, the IRS still may file a Notice of Federal Tax Lien (NFTL) at any time, generally, when you owe more than $10,000 to the IRS. 
  • Consider that if the tax lien has not been released that the IRS may be entitled to any proceeds from the sale of your lien property.
  • Consider whether your personal or business bank accounts and property will be included with the IRS OIC evaluation. The IRS allows you to make adjustments or exclusions to the OIC form details, that will be considered during the offer investigation. The adjustments are an allowance of $1,000 to a bank balance or $3,450 against the value of a car, are only applied if you are an individual and after it is determined that you cannot pay your tax debt in full.

This blog covers only the highlights of what are needed and other considerations to apply for an OIC. But, what are the details of what you need to know to apply and what are your chances of having your OIC approved, if you decide to apply? Read on to find out and to discover the latest developments.

What Are The Latest Developments?

Posted today in the IRS's e-News for Payroll Professionals2, the Form 656 Offer In Compromise Booklet3 has been updated. To avoid processing delays, a

ny OIC filed after April 25th must be completed using the new form. Generally, the IRS updates this booklet once a year in April to adjust the low income certification amounts found on page 2 of the Form 656. Keep reading to see a JPEG GIF of the new booklet.

Posted November 2, 2020 in the IRS's new release site4, the IRS announced a number of COVID-19 relief efforts designed to help struggling taxpayers impacted by COVID-19 to settle their tax debts with the IRS more easily. This included offering flexibility for taxpayers who temporarily cannot meet the payment terms of an accepted Offer in Compromise. This relief is for those taxpayers who already submitted a OIC and received a reply. 

How long will it take to receive a reply? Taxpayer replies are worked on a first-come, first-served basis and will be processed based the date the IRS receives it. IRS delays could add pressure to an already sensitive issue, as payers remain liable for the amount they don't pay with their return and all interest and penalties until the amount is paid in full. And, penalties for failure to pay with your return alone can be steep!

What are the chances that my OIC gets approved? Publication 55-B revised May 2022, provided statistical data from October 1, 2020 through September 30, 2021. Page 71 highlights of the data indicated that out of 49,285 offers in compromise submitted, 16,154 offers were excepted, 33% and increase of 1% from October 1, 2019 through September 30, 2020, that's 3 out of 10 offers.

These facts may it clear what the IRS explains on page 3 of the 656 booklet that:

"Submitting an application does not ensure that the IRS will accept your offer"

What can I do now? Continue reading to learn more about what you can do right now if you want to apply for an OIC, what other options are available, how to avoid unexpected letters from the IRS and the associated penalties in the future, and more.

What Does The New Booklet Look Like?

Here is a breakdown of Form 656 Offer in Compromise sections and key highlights:

  • Form detail and additional information
    • To: Commissioner of Internal Revenue Service
    • Include the $205 application fee and initial payment (personal check, cashier's check, or money order) with your Form 656 unless you qualify for the Low-Income Certification. You must also include the completed Form 433-A (OIC) and/or Form 433-B (OIC) and supporting documentation. You should fill out either Section 1 or Section 2, but not both, depending on the tax debt you are offering to compromise.
      • Section 1 Individual Information (Form 1040 filers)
        • Individual Tax Periods (If Your Offer is for Individual or Sole-Proprietor Tax Debt Only)
        • Low-Income Certification (Individuals and Sole Proprietors Only) (pg. 2)
      • Section 2 Business Information (Form 1120, 1065, etc., filers)
      • Section 3 Reason for Offer (pg. 3)
      • Section 4 Payment Terms
        • Lump Sum Cash (5 or fewer payments within 5 or fewer months from date of acceptance)
        • Periodic Payment (in full in 6 to 24 months)
      • Section 5 Designation of Payment, Electronic Federal Tax Payment System (EFTPS), and Deposit (pg. 4)
      • Section 6 Source of Funds, Making Your Payment, Filing Requirements, and Tax Payment Requirements
      • Section 7 Offer Terms
        • Terms, Conditions, and Legal Agreement (pg. 5)
          • a) I request that the IRS accept the offer amount listed in this offer application as payment of my outstanding tax debt (including interest, penalties, and any additional amounts required by law) as of the date listed on this form. I authorize the IRS to amend Section 1 or Section 2 if I failed to list any of my assessed tax debt or tax debt assessed before acceptance of my offer. By submitting a joint offer, both signers grant approval to the Internal Revenue Service to disclose the existence of any separate liabilities owed. Terms, Conditions, and Legal Agreement
          • b) I also authorize the IRS to amend Section 1 or Section 2 by removing any tax years on which there is currently no outstanding liability. I understand that my offer will be accepted, by law, unless IRS notifies me otherwise, in writing, within 24 months of the date my offer was received by IRS. I also understand that if any tax debt that is included in the offer is in dispute in any judicial proceeding that tax debt will not be included in determining the expiration of the 24-month period.
              • Pending status of an offer and right to appeal
                • j) Once an authorized IRS official signs this form, my offer is considered pending as of that signature date and it remains pending until the IRS accepts, rejects, or returns my offer, or I withdraw my offer. An offer is also considered pending for 30 days after any rejection of my offer by the IRS, and during the time that any rejection of my offer is being considered by the Appeals Office. An offer will be considered withdrawn when the IRS receives my written notification of withdrawal by personal delivery or certified mail or when I inform the IRS of my withdrawal by other means and the IRS acknowledges in writing my intent to withdraw the offer. Pending status of an offer and right to appeal
                • k) I waive the right to an Appeals hearing if I do not request a hearing in writing within 30 days of the date the IRS notifies me of the decision to reject the offer.
              • I must comply with my future tax obligations and understand I remain liable for the full amount of my tax debt until all terms and conditions of this offer have been met.
              • I understand the IRS may file a Notice of Federal Tax Lien on my property.

How Can You Help Me Right Now?

If you have received a balance due notice or and would like us to apply for OIC for you, both services are covered under our Silver and Gold service packages. Contact us today to discuss a preliminary plan of action that considers your personal tax situation and maximizes the relief that you qualify for. You can also, download our free eBook to learn more about how to setup an installment agreement. 

Want a heads up if notices may be coming your way? We can do that for you, visit The Tax Monitor for more information.

Have you received an IRS notice? Read IRS Notices: What Are They & What Do They Mean? and find out what notices the IRS temporarily stopped mailing.

We Hope This information Was Helpful.

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Reference:

1Item 4 may seem unusual as Offers In Compromise (OIC) are considered by the public at large as a form only available to individual. The facts are the OIC is available to corporations and small businesses.

2IRS e-News for Payroll Professionals: Offer in Compromise Form 656 Booklet updated for 2022 – Use current version to avoid processing issues

3IRS Pub. 656 Offers in Compromise Booklet (Rev. 4-2022)

4IR-2020-248, November 2, 2020 --- IRS makes it easier to set up payment agreements; offers other relief to taxpayers struggling with tax debts
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