What is an offer in compromise?
Known as an OIC, an offer in compromise is an agreement between the Internal Revenue Service and a taxpayer that dissolves the taxpayer of any tax liability. Under certain circumstances, the IRS is able to compromise or settle any federal tax liabilities by accepting a payment for less than the full amount owed. The IRS may legally settle a taxpayer’s tax liability for any of the following reasons:
• Liability Doubt – Doubt exists regarding whether or not the assessed tax is correct.
• Collectability Doubt – Doubt exists that a taxpayer is able to pay the full amount of the tax that is owed. To qualify for an OIC based upon this reason, the minimum offer amount must be equal or greater to the reasonable collection potential of a taxpayer. Also called the RCP, the reasonable collection potential is the total value of a taxpayer’s real and personal assets as well as his or her future income.
• Effective Tax Administration – There are exceptional circumstances present suggesting the collection of the full amount owed will result in economic hardship for a taxpayer, or equity and public policy provide sufficient means for a compromise. However, a taxpayer must show proof that their OIC qualifies for equity or public policy considerations.
What is required to obtain an OIC?
To gain consideration for an OIC, the following requirements must be met by a taxpayer:
• The most current versions of Forms 433-A, 433-B, and 656 must be used.
• Form 656 or a $150 application must be submitted.
• Every required federal tax return must be filed.
• The required employment tax returns for two quarters prior to the OIC filing must be filed and paid. Also, deposits for the quarter in which the OIC is submitted must be current.
• A taxpayer must not be a debtor in relation to a bankruptcy case.
• Following the acceptance of an OIC, a taxpayer must comply with all paying requirements and federal tax filings for five years, or until the OIC has been paid in full.
How is an OIC completed?
To complete an OIC, an individual must first obtain a Form 656 package from the IRS website. The OIC package includes instructions on how to complete the form and a worksheet to make calculations. Other necessary forms, such as Form 433-A and Form 433-B, are included as part of the Form 656 package.
When must Form 433-A and Form 433-B be completed?
Form 433-A and Form 433-B, also called Collection Information Statements, are required for effective tax administration OICs, and they are also required to show evidence of doubt of collectability. They are also needed to show doubt involving liability in Trust Fund Recovery Penalty assessments.
Are the OIC forms available online?
The necessary forms to complete an OIC are available online at the IRS website. They can also be obtained at a local IRS office or by calling 1-800-829-3676.
What forms are needed to obtain an effective tax administration OIC?
To be considered for an effective tax administration OIC, a taxpayer needs to submit the latest version of Form 656, Form 433-A, and Form 433-B.
On Form 656, a taxpayer must write a detailed narrative under Item 9. In the narrative, a taxpayer must explain any exceptional circumstances and why a full tax liability payment would result in an economic hardship. In the narrative, a taxpayer can also demonstrate sufficient equity or public policy considerations to achieve an accepted recommendation. However, a taxpayer must show proof that their OIC can qualify for equity or public policy considerations. A taxpayer must also provide proof that his or her circumstances are more compelling than other taxpayers facing similar circumstances in order for their OIC to be accepted.
Can a person that qualifies for an installment agreement submit an OIC?
If an individual can pay their tax liability in an installment agreement or lump sum, than he or she will be unable to be considered for an OIC. If a person still receives an OIC, it will end up being rejected. However, the individual will have the right to appeal. The only exception to this rule is if a request is made by the taxpayer for an effective tax administration OIC.