An offer in compromise (OIC) is an agreement between a taxpayer and the Internal Revenue Service (IRS) to settle a taxpayer’s tax liabilities for less than the total amount owed. The taxpayers who can fully pay the liabilities through an installment agreement or other means generally will not qualify for an OIC. According to the IRS, to be eligible for an OIC, the taxpayer must have filed tax returns and made all required estimated tax payments for the current year or all required federal tax deposits for the current quarter if the taxpayer is a business owner.
How to apply for an IRS offer in compromise
An application for an IRS offer in compromise has three parts:
- Completed IRS forms 433-A (individuals) or 433-B (businesses) and 656. If you believe the tax debt isn’t yours or doesn’t exist, you can also file Form 656-L;
- A $205 application fee is non-refundable; however, it may be waived if you meet the IRS low-income guidelines; and
- A payment toward your proposed new balance.
You will need to provide information about your monthly income, assets, cash, and your expenses, and liabilities when you apply for an IRS offer in compromise.
The IRS generally will not accept an OIC unless the amount offered by a taxpayer is equal to or greater than the reasonable collection potential (RCP). The RCP is how the IRS measures the taxpayer’s ability to pay.
The RCP includes the value realized from the taxpayer’s assets, such as real property, automobiles, bank accounts, and other property. In addition to these assets, the RCP also includes anticipated future income less certain amounts allowed for basic living expenses.
The IRS will return any newly filed Offer in Compromise (OIC) application if you have not filed all required tax returns and have not made any required estimated payments. The IRS provides this Offer in Compromise Pre-Qualifier on its website so that you can confirm your eligibility before filing.
On November 15, 2021, the Taxpayer Advocate Service (TAS) and the IRS collaborated on two significant OIC refund offset policy changes. Both changes are favorable for taxpayers who owe federal taxes. This new policy in OICs marks a substantial shift for the benefit of taxpayers with accepted offers. It will also help taxpayers experiencing financial hardships. The TAS collaborated with the IRS to remove some obstacles for taxpayers considering an OIC. An OIC allows taxpayers to settle their tax liability for less than the total amount owed for tax liability for the years in question. Effective November 1, 2021, taxpayers will be allowed to keep their tax refunds once the IRS accepts their OICs and enables certain taxpayers to seek Offset Bypass Refunds (OBR), as discussed below. OICs are pending before the IRS.
Here are the changes to the two policies:
First Change – Tax Refund Offset Relief –
The IRS will no longer offset claimed refunds for the calendar year in which the OIC was accepted. They will no longer apply that refund to the outstanding tax liability for the year(s) included in the OIC agreement (see Form 656). Before November 1, 2021, the IRS kept any refunds, including interest, that taxpayers might be owed for tax periods extending through the calendar year in which the IRS accepted the offer. Under the change to OIC, the IRS will forego taking the post-offer acceptance refund and applying it to the year(s) of the offer acceptance.
This could be a game-changer for many taxpayers, even considering submitting an OIC with the IRS. For those facing an unanticipated detrimental change in their financial situation or whose lives spiraled due to COVID-19, natural disaster, or other reasons, losing a tax refund may fuel economic chaos and leave the taxpayer unable to meet basic living expenses. An accepted OIC without a tax refund may provide financial security for many taxpayers with back taxes. The benefit for the year of OIC acceptance will vary based on the refund amount.
Second Change – Offset Bypass Refund Relief
The IRS has the statutory authority and discretion to offset refunds when taxpayers owe other federal debt or state taxes. Before November 1, 2021, taxpayers who submitted an OIC could not obtain the refunds shown on their tax returns for the year the IRS accepted their offer and had no administrative remedies.
Under the new OIC policy, the IRS will forego the refund offset and issue the refund if the taxpayer only owes federal taxes and is experiencing economic hardship through an Offset Bypass Refund. The new OIC policy enables certain taxpayers to seek the OBR while their OICs are pending before the IRS. The new procedures allow qualifying taxpayers who are experiencing financial hardship to seek an OBR during the pendency of their OIC. These individuals would be able to retain their tax refunds as long as they meet the specific criteria in the Internal Revenue Manual (IRM).
These two favorable changes will allow more taxpayers to be eligible for an Offer in Compromise to settle their back taxes and improve their financial situations.
Seek Help in Filing an OIC
In general, the IRS OIC acceptance rate is relatively low. In 2019, only one-third of them were accepted by the IRS. There are two main reasons that DATC OICs are not accepted. First, the taxpayer does not qualify. The second reason is the taxpayer cannot pay the calculated offer amount. If you are considering filing an OIC, it is best to seek help from a tax professional. Besides the OIC program, there are other tax relief options available. You want to hire a tax professional that will help you strategize, take full advantage, and save you considerable money.
Estess CPAs provides permanent solutions to IRS and state tax problems for taxpayers. Since 2001. Estess CPAs has been helping businesses and individuals succeed. With two locations to serve you, Estess CPAs we have the expertise and credentials of larger firms without compromising the personal service our clients have come to appreciate.
At Estess CPAs, we believe information and planning enhance success. Specializing in small business solutions, we believe the key to successfully managing any business starts with well-informed accounting and payroll systems. Accurate and timely data empowers companies to analyze and react to upcoming needs and changes. Our professionals are experts at keeping accounting systems and payroll processes running smoothly.
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