An offer in compromise is essentially a form of loan settlement with the IRS, upon which an individual offers the
IRS a certain amount of money and the IRS subsequently waives the individual’s outstanding debt. The individual will have to fill in the form 656 – details the time periods for which the taxes are owed- for his/ her application to be considered.
Reasons for OIC
There are 3 reasons for which an individual can be considered for an offer of compromise with the IRS. The first is Doubt as to Collectability, which means that the individual is unable to repay the total amount of taxes owed. This is the main reason for which most individuals apply for the offer in compromise. However, the IRS has enforced strict guidelines, the eligibility for the Doubt as to Collectability is restricted to those whose income falls below the threshold mark.
The Doubt as to Liability, meanwhile, is when the taxpayer doubts whether he/ she is actually responsible for the total amount of taxes owed. The last reason, the Effective Tax Administration is unusual, and only apply to cases where individuals claim that paying the tax would “pose a serious economic hardship, would be unfair, and would be inequitable”
Hire a professional
Although filing the OIC does not necessitate a legal attorney, it would be advisable to gain professional advice, as most applications for the Offer in Compromise are rejected outright. In 2011, the acceptance rate was hovering at 33%. A professional would presumably have experience in applying for the Offer in Compromise and would be able to guide you on the necessary steps to maximise the chances of your application being approved. The professional would also be able to propose an appropriate amount of money to be offered to the IRS.
OIC Payment Options
Along with the $186 application fee, applicants have two methods of payment for the OIC – Lump Sum Cash and Periodic payment. In the former, applicants have to first pay off 20% of the total payment and to wait for an approval letter before paying off the rest in five or fewer instalments. In the latter, meanwhile, the applicants are allowed to make monthly payments, until the entire amount is paid in full.
New guidelines imposed for the OIC
As opposed to the Allowable Living Expense standards -rigid conditions are enforced as to the amount of money an individual spends on essential goods before being disqualified from applying for the OIC regardless of an individual’s geographical location-, new regulations are being introduced to allow more flexibility with regards to the miscellaneous allowance. Now the IRS are also beginning to recognize taxpayer’s obligations to “pay student loans and state tax delinquencies”, thereby allowing a larger amount of deserving citizens to qualify for the OIC.
Though applying for the OIC is a complicated and often intricate process, it is hoped that this article clarifies it and makes it easier to understand.