How does offer in compromise work

The OIC program gets a lot of hype in the press and media, but it is rarely used. First, most applicants may not qualify. They may have equity in assets or future income that can pay their tax liability before the IRS collection statute expires generally 10 years from the date the tax is assessed. The IRS will not settle with this solvent taxpayer unless the taxpayer has special circumstances.

This means the taxpayer may not be able to fund the OIC settlement. The user fee usually does not prohibit many from applying for an OIC. The real cost is how much is needed to settle the tax bill. Third, taxpayers will not qualify for an OIC unless they have filed all tax returns and made all required estimated tax payments for the current year, if applicable. To qualify, business owners with employees must have made all required federal tax deposits for the current quarter. In addition, taxpayers with an open bankruptcy cannot apply for an OIC.

Most people believe that the IRS haggles with the taxpayer about how much it will take to settle the tax bill. Some believe that the IRS will just take a percentage of the bill or waive penalties and interest in a settlement.

These are all myths. First—does the taxpayer qualify for an OIC? In this case, the taxpayer qualifies for an OIC.

Next—the offer amount. The future multiplier of MDI will depend on the payment option that the taxpayer chooses. A taxpayer can either choose to pay the offer amount through a lump sum cash offer, an offer payable in 5 or fewer installments within 5 months after the offer is accepted, or through a periodic payment offer, an offer payable in 6 or more monthly installments over 24 months.

If the taxpayer elects to pay the IRS through the lump sum cash offer method, they will use 12 months as the future income multiplier. The future income multiplier is 24 months if the taxpayer uses the periodic payment offer method. Taxpayers who miss these calculations may find out that they do not qualify or have a higher offer amount that they cannot pay in the future.

The reality is many cannot and therefore cannot use the OIC program. Unless the taxpayer qualifies as a low-income taxpayer, they will need to be able to pay some of the OIC before it is approved. Any upfront payment is non-refundable. When the IRS terminates an OIC, the agreement is no longer in effect and the IRS may then collect the amounts originally owed less payments made , plus interest and penalties.

The letter will explain the reason that the IRS rejected the offer and will provide detailed instructions on how the taxpayer may appeal the decision to the IRS Office of Appeals. The appeal must be made within 30 days from the date of the letter.

In some cases, an OIC is returned to the taxpayer rather than rejected, because the taxpayer didn't submit necessary information, filed for bankruptcy, failed to include a required application fee or nonrefundable payment with the offer, hasn't filed required tax returns, or hasn't paid current tax liabilities at the time the IRS is considering the offer. A returned offer is different from a rejection because there's no right to appeal when the IRS returns the offer.

However, once cured, the offer may be submitted again. You may use the Offer in Compromise Pre-Qualifier tool to confirm your eligibility and prepare a preliminary proposal. More In Help. A compromise meets this criterion only when there's a genuine dispute as to the existence or amount of the correct tax debt under the law.

Second, the IRS can accept a compromise if there is doubt that the amount owed is fully collectible. Doubt as to collectibility exists in any case where the taxpayer's assets and income are less than the full amount of the tax liability. Third, the IRS can accept a compromise based on effective tax administration. An offer may be accepted based on effective tax administration when there is no doubt that the tax is legally owed and that the full amount owed can be collected, but requiring payment in full would either create an economic hardship or would be unfair and inequitable because of exceptional circumstances.

Application Fee In general, a taxpayer must submit an application fee for the amount stated on Form However, there are two exceptions to this requirement: First, no application fee is required if the OIC is based on doubt as to liability.

Second, the fee isn't required if the taxpayer is an individual not a corporation, partnership, or other entity who qualifies for the low-income exception. Two separate Forms , one for the business or corporation liabilities and one for the individual liabilities, when the intent is to compromise both if:. Both sections should not be combined on one Form One form may be used if your business is a sole proprietorship linked to your SSN.

A separate offer, with application fee and offer payment, is needed if your business is not a sole proprietorship linked to your SSN. You will need to gather information about your household's average gross monthly income and actual expenses. The entire household includes all those in addition to yourself who contribute money to pay expenses relating to the household, such as rent, utilities, insurance, groceries, etc.

This is necessary for the IRS to accurately evaluate your offer. It may also be used to determine your share of the total household income and expenses.

You may designate which tax debt you would like to apply your offer payment s to in writing when the offer is submitted or when the payment is made. You may not designate the application fee, or any payment after the IRS accepts the offer. In the absence of any written designation request, the IRS will apply the offer payment s in the best interest of the government.

You should send two checks, one for the application fee and one for the required offer payment. If only one check is received, the IRS will apply the application fee first and then the remainder toward the required payment amount. If you do not qualify for the low income certification, or have not checked the low income certification box, the offer will be returned. If you qualify for the low income certification, and have checked the box, the money will be held as a deposit until a decision has been made on your offer.

Checks that combine application fees for several offers will not be accepted and the offers will be returned. Each Form must have separate checks attached. For offers originally sent to Holtsville, NY, send the payment to: P. Box , Holtsville, NY Box , Memphis, TN Offer payments that must be sent with the offer are not refundable. The IRS will try to contact you to provide you with one opportunity to pay the missing amount. If you do not make the payment, the offer will be withdrawn and returned to you without appeal rights.

All payment s already received will be applied to your tax liabilities. The IRS will also keep the application fee. If a triggering event occurs and you properly enter into a transfer agreement under section i 2 , your section i net tax liability associated with the transfer agreement will not be assessed.

If you do not enter into a transfer agreement under section i 2 , you will be required to timely pay the triggered section i net tax liability either in its entirety or according to the installment schedule if you properly make a section h election with respect to the triggered section i net tax liability or the offer will default.

Review the letter for the reason s we returned your Offer in Compromise. If you believe we returned the offer in error, you can request a reconsideration by calling the number on your return letter and providing your objections within 30 days from the date of the return letter.

If you no longer have the original Form , you can provide a new Form with the same offer amount and terms as the original. If you paid an application fee that was returned to you, then you must send the application fee back to us; any offer payments you paid with the original offer will be applied to your new offer. If you need new forms, you can download a copy on irs. If you disagree with the rejection, you have 30 days from the date on the rejection letter to appeal by following the instructions in the letter.

If you agree with the rejection, you can send full payment of your tax debt to avoid additional interest and penalty, or request an installment agreement to pay your tax debt. You must remain in compliance with filing and payment of all tax returns for a period of five years from the date the offer in compromise is accepted, including any extensions. If you do not pay the offer in compromise on time and remain in compliance during the five-year period after the offer in compromise is accepted, including any extensions, your offer will default.

A copy of the acceptance letter is in the offer case file, which has been forwarded to the Federal Records Center. Effective June 25, , once your offer is accepted, all offer payments should be mailed to:.

A one-time extension may be granted on an offer payment within a month period. All subsequent payments must be made timely. Contact the monitoring examiner to request the extension. As part of the accepted offer agreement the IRS will keep any refund, including interest, for taxes due through the calendar year that the offer was accepted.

For example, if your offer is accepted in and you are due a refund when you file your Form or SR on April 15, , the IRS will apply your refund to your total tax debt. This refund will not be counted as a payment toward your accepted offer amount. The refund that is retained as part of the offer agreement is applied to the overall tax debt and is not considered a payment toward your accepted offer amount.

Your subsequent refunds can be applied to your offer balance with a signed written request. You may not specify to which tax period the payment should be applied. Both signatures are required on the request if the tax return was filed jointly. Requests may be mailed to the following applicable monitoring site based on where you submitted your initial offer:. Once your offer is accepted, additional tax balances cannot be added to the offer and must be paid in full or the offer will default.

Note: Installment agreements are not allowed with new balances. The IRS electronically releases liens to the county where the lien was filed.

The county is responsible for release of information to the credit bureaus. Note: If you need assistance regarding a lien you can call the Centralized Lien Processing External line at You must continue to file and pay all of your taxes on time for the timeframe noted in the offer contract including any Collateral Agreement signed as part of the accepted offer. When an offer defaults, the IRS may levy or file suit to collect the entire balance of the offer or an amount equal to the original tax debt less any payment s received under the terms of the offer.

All penalties and interest will be reinstated. Liens and levies may be placed on the account.