An Offer in Compromise
An Offer in Compromise (OIC) is a negotiated deal that the IRS gives to a taxpayer who has an outstanding tax liability and is unable to pay it off for one reason or another. The Offer reduces the tax liability of the taxpayer depending on his or her ability to pay and reduces the tax debt to as little as 1% of the taxes owed. OIC is given at the discretion of the IRS and is not a right of any taxpayer. To qualify for an OIC, you need to have made full disclosure and correct submission of your tax returns. The chances of winning an OIC are low (below 50% of applications). According to the IRS, there are three reasons that can qualify a taxpayer for an Offer in Compromise.
- Doubts on Tax Collectability – The first condition that can grant a taxpayer an OIC is if there are doubts as to whether the IRS can successfully collect the tax debt from the taxpayer within the time frame allowed by the law. To qualify, the taxpayer needs to have no assets that they can cash out and their monthly income too little to pay the tax debt while paying for their necessary minimum living expenses.
- Doubt on Accuracy of Tax Liability – This is a rare qualification option for an OIC. To qualify, there must be significant doubts as to whether you really owe the tax liability that remains outstanding. This can happen if the taxpayer produces new evidence that casts doubt on the existence or legitimacy of the tax liability or if a tax law was misinterpreted when determining the tax liability.
- Exceptional Circumstances – Even in situations where the tax liability in question is correct and the taxpayer can manage to make payments, the IRS can still consider an OIC if payment of the tax liability would have the taxpayer living in financial hardship or if paying the tax liability would be unfair in one way or another.
Installment Agreements are another product negotiated with the IRS. The IRS provides various installment payment plans for taxpayers who have a tax liability that they cannot pay off in a single lump-sum (without having the taxpayer suffering below the necessary living standards). People who owe the IRS below $25,000.00 can go for a Streamlined Installment Agreement that does not require forwarding financial documentation to the IRS. On the other hand, if a taxpayer owes over $25,000.00, they will need to call the IRS and negotiate for an Installment Agreement.