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| What is an offer in compromise? |
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Last Updated
14th of August, 2009
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Offer in compromise: An offer in compromise (OIC) is an agreement between a taxpayer and the IRS that settles an individual’s tax liabilities for less than the full amount owed. The IRS will not accept the offer if it believes that the liability can be paid in full as a lump sum or through a payment agreement.
Basically an OIC is your ability to pay versus the IRS’ ability to collect. Ask yourself this question: If the IRS were to take everything from you (your wages, your assets, etc.) would that satisfy the debt? If the answer is no, you may qualify for an offer in compromise. However, keep in mind that the IRS has a very specific formula for determining your ability to pay.
An offer in compromise should be your last resort, meaning that you have investigated the requirements of the other plans and have determined that you don’t qualify or you cannot afford the payments.
Initiating the process, filing accompanying forms, and paying the application fee (roughly $150) rests entirely on your shoulders. Be forewarned that acceptance into the program is stringent; the IRS resolves very few cases this way. According to Tax Solutions, the IRS rejects approximately 83 percent of offer in compromise cases. For this reason, you should only apply for this program if you are sure it is one of your final options. Otherwise you could end up wasting time and money.
Keep in mind that the entire process of an OIC may take up to two years just to get accepted. Speak to a tax professional and make sure that you can qualify; otherwise you may be wasting your time. Make sure the time and effort are worth it, and the hard work will be rewarding when you reap the savings.
Finally, taxpayers should wary of promoters’ claims that tax debts can be settled through the offer in compromise program for "pennies on the dollar". If the offer seems to good to be true, it probably is, and it may be a scam.
Other important notes to keep in mind:
- Your tax lien remains in place: Even if the IRS approves your application, your tax lien remains until your tax debt is paid in full. According to the IRS, you have less incentive to finish paying your debt without the tax lien in place.
- Prior tax levies don´t change: The IRS will keep the proceeds from a levy served prior to submission of an offer in compromise. This means the money the IRS seized from your bank account prior to the OIC will not count towards the offer in compromise – the IRS will keep these funds.
- No more refunds: No tax refunds will be received until the tax debt is paid in full. The IRS is letting you pay less than you owe, after all.
- Collections statutes extended: The statutory period of your debt is suspended while the IRS investigates your offer, and it’s further extended if you appeal an offer in compromise rejection. This will extend the amount of time the IRS has to collect on your tax debt. Make sure you’ll be approved if you apply; the statute of limitations on your debt can be extended for years.
Read more about what you should do if you can’t afford to pay your taxes.
Get a free tax consultation to resolve delinquent tax debt today!
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