According to the IRS Code, “We will accept an Offer in Compromise when it is unlikely that we can collect the full amount owed and the amount you offer reasonably reflects the collection potential…” (Internal Revenue Code section 7122).
What Is an Offer in Compromise?
An Offer in Compromise (OIC) is a tax relief program offered by the IRS, enabling taxpayers to settle their federal tax debt for less than the full amount owed. This solution is ideal for individuals and businesses facing significant financial hardship or disputes over the tax amount owed. For those who qualify, an approved OIC provides an opportunity to resolve outstanding tax burdens, potentially saving thousands of dollars while avoiding further collection actions like liens or levies.
While the IRS oversees this program at the federal level, some states also offer similar tax settlement options. However, these state-level programs vary, and not all states provide the opportunity to negotiate tax debts. If the IRS accepts your offer, you are required to pay the agreed-upon amount, and the remaining tax liability is forgiven, granting you a clean slate for the settled tax period.
Since the process can be complex, involving detailed financial documentation and adherence to specific rules, many taxpayers seek guidance from experienced professionals like an Atlanta tax preparation CPA or a tax resolution services Atlanta expert to improve their chances of success.
How to Qualify for an Offer in Compromise
Qualifying for an OIC involves meeting strict criteria set by the IRS. The program is designed to help taxpayers who cannot afford to pay their tax debt in full or who dispute the accuracy of the tax liability. Before applying, you must meet several prerequisites:
Tax Debt Notice: You must have received an official bill for the taxes you want to settle. This ensures the IRS has formally assessed your liability.
Bankruptcy Status: You cannot be in an active bankruptcy case. Tax debts are typically handled separately in bankruptcy proceedings.
Tax Compliance: All required tax returns must be filed, including any past-due filings. Being current on your tax filings demonstrates good faith to the IRS.
Estimated Tax Payments: If you’re required to make estimated tax payments, such as self-employed individuals, these must be up to date for the current tax year.
Federal Tax Deposits: For businesses, all required federal tax deposits, such as payroll taxes, must be paid before applying for an OIC.
Beyond these initial qualifications, eligibility also depends on the type of OIC you pursue. The IRS offers three primary options:
Doubt as to Collectibility (DATC):
This is the most common type of OIC.
You qualify if your financial situation shows that you cannot afford to pay the full amount of your tax debt, even through collection methods such as wage garnishments or asset seizures.
The IRS will assess your income, allowable expenses, and assets to determine your ability to pay.
Effective Tax Administration (ETA):
You may qualify if you can technically pay your full debt but doing so would cause significant economic hardship or if requiring full payment would be inequitable.
This option often applies in cases involving elderly taxpayers, individuals with significant medical expenses, or those with unique circumstances.
Doubt as to Liability (DATL):
If you believe the tax amount assessed is incorrect, this option allows you to settle based on what you genuinely owe.
To qualify, you must present evidence disputing the liability, such as incorrect tax calculations or legal interpretations.
Meeting these qualifications is just the first step. The IRS conducts a thorough review of your application, including a detailed analysis of your finances and supporting documents. For example, in a DATC case, the IRS will examine your monthly income, living expenses, and equity in assets like property or vehicles. They will also consider their ability to collect through other means.
Why Tax Compliance Matters
The IRS requires applicants to demonstrate ongoing tax compliance as part of the qualification process. This includes filing current and past-due returns and staying current with tax obligations during the application process and for five years after approval. Failing to maintain compliance during this period can result in the IRS revoking the agreement and reinstating the full tax liability.
Since the stakes are high, working with an experienced Atlanta tax accountant or tax preparer Atlanta can ensure you meet all the necessary qualifications and help you avoid costly mistakes. These professionals can also assist with navigating alternative tax resolution options if you do not qualify for an OIC.
Understanding the IRS Pre-Qualifier Tool
Curious about your eligibility for an IRS Offer in Compromise (OIC)? The IRS Pre-Qualifier Tool is a helpful starting point to assess whether you meet the basic requirements. By inputting details about your income, expenses, and assets, you can get an initial indication of your chances. However, while convenient, this tool has limitations. It doesn’t account for unique circumstances or complex financial situations, which can be pivotal in determining eligibility.
Before relying solely on the tool, consult a tax resolution services Atlanta expert who can provide a more comprehensive evaluation. Additionally, you can reference our detailed guide to better understand the tool’s benefits, drawbacks, and the scenarios where it may be most helpful. This ensures you’re fully informed before making decisions.
Types of Offers in Compromise
When applying for an OIC, understanding the three available types is critical. Each option is designed for specific circumstances, so it’s essential to identify the one that best aligns with your situation. Here’s an overview:
Doubt as to Collectability (DATC)
The most common type of OIC.
Applies if your financial situation shows you cannot pay your tax debt in full, even through enforced collection actions like wage garnishments or asset seizures.
The IRS will evaluate your income, allowable expenses, and equity in assets to determine whether to accept your offer.
Effective Tax Administration (ETA)
You may qualify under this option if you can technically pay your tax debt but doing so would cause undue hardship or would be considered unfair.
This option often applies in cases involving elderly taxpayers, individuals with significant medical expenses, or those with unique financial challenges.
Doubt as to Liability (DATL)
For taxpayers who dispute the accuracy of their tax liability.
Requires presenting evidence, such as documentation showing errors in calculations or incorrect legal interpretations, to prove you owe less than the assessed amount.
Choosing the correct option is crucial. An Atlanta CPA for tax preparation or a skilled tax attorney can guide you in selecting the appropriate type and crafting a compelling case.
Tips for Calculating Your Offer Amount
When applying for an IRS Offer in Compromise (OIC), determining the right offer amount is critical. The IRS evaluates offers based on the type of program you qualify for, and your offer must align with their criteria to be accepted. Here’s how to calculate your offer based on each type:
Doubt as to Collectability (DATC)
The IRS accepts offers only if they exceed what the agency could collect through other means, such as wage garnishments or asset seizures.
To determine your offer, you must consider factors like monthly income, allowable living expenses, current debts, asset equity, and projected future earnings.
A tax accountant Atlanta can help calculate an offer that meets IRS requirements while ensuring it’s manageable for your financial situation.
Effective Tax Administration (ETA)
For taxpayers who can afford to pay in full but would face significant economic hardship, the IRS may accept a reduced offer.
Your offer should balance fairness and financial feasibility. Consider medical expenses, age-related hardships, or other special circumstances when determining your amount.
Working with a tax preparation Atlanta CPA ensures your application reflects these unique considerations.
Doubt as to Liability (DATL)
This type of offer focuses on disputing the accuracy of your tax liability.
Your offer should represent the amount you genuinely owe based on the evidence you provide, such as documentation proving errors in IRS assessments or legal interpretations.
Income or future earnings do not impact this type of offer, making precise documentation critical.
What Is the Minimum Offer Amount?
The IRS doesn’t specify a universal minimum offer amount. Instead, the minimum you can offer depends entirely on your financial situation and the specifics of your case. However, offering more than necessary could cost you money unnecessarily.
A tax professional Atlanta or a certified tax resolution specialist can help pinpoint the “sweet spot” for your offer—high enough to meet IRS standards but low enough to ease your financial burden. Their expertise ensures your application is tailored to your circumstances while maximizing the likelihood of acceptance.
Special Circumstances When Applying for an OIC
The IRS uses strict expense allowances when evaluating OIC applications. These allowances outline what the agency considers reasonable for categories such as housing, transportation, and utilities. If your actual expenses exceed these limits, the IRS typically excludes the excess from your calculation.
However, if you have special circumstances—such as medical conditions requiring higher living expenses—you can explain these in your application. Proper documentation and a well-prepared explanation can make a significant difference in getting these exceptions considered. Enlisting the help of an Atlanta tax preparer ensures these factors are accurately presented in your application.
What Happens After the IRS Accepts Your Offer?
If the IRS approves your offer, you must adhere to several critical requirements:
Make Payments on Time:
You are required to pay the agreed-upon amount within the timeframe outlined in your offer.
Failure to meet these deadlines can void the agreement.
Maintain Tax Compliance:
For five years following approval, you must remain in full compliance with all tax obligations. This includes filing all required returns and paying any future taxes on time.
If you fail to stay compliant, the IRS may rescind the offer and demand full payment of the original liability.
Once the payment terms are met, and compliance is maintained, you’ll no longer owe taxes for the period included in the agreement. To ensure long-term success and avoid compliance pitfalls, work with an experienced Atlanta tax services provider who can guide you through the post-approval process.
By partnering with a trusted professional, you can confidently navigate every stage of the OIC process, from calculating your offer to maintaining compliance after approval.
How to Apply for an IRS Offer in Compromise
Applying for an OIC involves submitting detailed forms, financial documentation, and an offer amount for IRS consideration. Follow these steps to navigate the application process:
Gather Required Forms:
For collectibility or effective tax administration offers, complete Form 656-B.
For liability-based offers, submit Form 656-L.
Additionally, individuals must include Form 433-A (OIC) for financial disclosures, while businesses submit Form 433-B (OIC).
Include Supporting Documents:
For DATC or ETA offers, provide proof of income, expenses, assets, and liabilities.
For DATL offers, submit evidence that supports your claim that the assessed tax liability is incorrect.
Calculate Your Offer:
The offer amount depends on the type of OIC and your financial situation. For DATC offers, it must exceed what the IRS could collect through other means.
Tax professionals specializing in tax services Atlanta can help you determine the optimal offer amount to increase the likelihood of acceptance.
Submit Payment:
Include an initial payment with your application. For DATL offers, the application fee and initial payment are waived.
Seek Expert Assistance:
Enlist the help of EAS Income Tax Services. They can handle the paperwork, ensure compliance with IRS requirements, and advocate on your behalf.
The process can be complex, but proper preparation and professional guidance increase your chances of a successful resolution. If you’re unsure about how to proceed, consult with a trusted Atlanta tax preparer to simplify the process and improve your outcome.
By meeting these requirements and presenting a strong case, you can significantly increase your chances of resolving your tax debt and achieving financial peace of mind. If you’re unsure where to start, consult a trusted Atlanta tax services provider who can guide you through the process and advocate on your behalf.
Paying for Your Offer in Compromise Settlement
If the IRS accepts your Offer in Compromise, there are two main payment options. When you apply, you choose the method that works best for your situation. You can opt to pay off the offer in a lump sum or what some call a cash offer, you have to pay the offer within five months or if you do a deferred payments offer or periodic payments offer, then you have to pay it off within 24 months.
You also have to send an initial payment with your application if you apply based on doubt as to collectability. There is also an application fee. If you apply based on doubt as to liability, you don’t have to send an initial payment or the application fee. Check out this resource to learn more about how the different payment options work and how they affect your offer amount.
What Happens If the IRS Rejects Your Offer?
If the IRS rejects your offer, the full tax liability is due. You should make arrangements to pay off the tax debt. For instance, you may need to set up monthly payments or look for another resolution option. Alternatively, if you don’t agree with the reason for the rejection, you can appeal.
How to Appeal a Rejection of an Offer In Compromise
The IRS may return your offer if you don’t meet the requirements or haven’t provided the right information. If you submit everything and the IRS doesn’t agree with the offer, it can reject your application, but luckily, you can appeal. Look at this resource to check out the reasons why an IRS Offer in Compromise may be rejected, and learn how to appeal a rejection.
2021 Updates to the IRS Offer-in-Compromise Policy
As of November 1, 2021, the IRS has updated its OIC policies to make the process easier for taxpayers. In the past, the IRS kept tax refunds from taxpayers who had been approved for an OIC in the same calendar year.
For example, if someone was approved for an OIC on their 2017 and 2018 taxes in 2020 and they earned a refund when they filed their 2020 tax return, the IRS had the right to keep that refund. Under the new rules, the IRS will no longer keep these refunds.
However, the IRS can still keep refunds that you earn while the application is pending. However, if a taxpayer is experiencing financial hardship, they can ask the IRS to not keep the refund. Then, the IRS will look at the exact amount of money the taxpayer needs for their hardship, and the IRS will send the taxpayer that amount of money from the refund. The IRS can keep the rest of the refund.
Other Things to Know About IRS Offers in Compromise
Still, have more questions about what an IRS offer in compromise is? Again, it’s when the IRS agrees to let you settle your tax bill for less than you owe. This can happen if you can’t afford to pay, it would be unfair to make you pay, or you don’t really owe the tax bill. Here’s a breakdown of some more details.
How the IRS Decides Whether to Accept an Offer in Compromise
As explained above, there are different criteria for each type of offer in compromise. The IRS looks to see if you meet the criteria. Then, the agency decides whether or not to accept your offer. If the IRS thinks you can pay more, you legitimately owe the tax, and it would be fair to make you pay it, the agency probably won’t accept your offer.
Offer in Compromise Acceptance Rates
The IRS rejects most offers. Only 30.7% of all offers were accepted in 2021. This means that the IRS rejected almost 70% of applications. Generally, you can only get approved if you have serious financial issues and you can’t afford to pay more than your offer.
There is no time in the recent past that the IRS has accepted more than half of the applications to this program. The highest acceptance rate was in 2016, and it was just 42.8%, meaning the agency rejected 57.2% of all applications. If you want to boost your chances of success, you should work with a tax professional who has experience with this program.
Other Options: Alternatives to the OIC Program
If you don’t qualify for an OIC, you should look into other options. The IRS has many different programs to help taxpayers get caught up on back taxes. Depending on your situation, you may want to look into the following programs:
Hardship Status — If you can’t afford to pay but you don’t meet all of the offer in compromise criteria.
Innocent Spouse Relief — If the tax debt is due to your spouse or former spouse’s actions and you didn’t know that they understated or underpaid the tax or it would be unfair to hold you responsible for other reasons.
Monthly Payment Plans — If you can afford to make monthly payments on your tax debt.
Penalty Abatement — If you want to ask the IRS to remove penalties from your account. This can be used in conjunction with the other resolution options.
When you contact an Atlanta tax professional to talk about your account, they can help you determine which of these alternatives might be the best option for your situation.
How OIC Tax Services Work
When you hire EAS Income Tax Services we start by talking about your situation. We help you determine if you might qualify for this program, and if it looks likely, we will help you apply. If this doesn’t appear to be the ideal option for your situation, we will help you consider other options.
When to Hire a Tax Expert to Help You
You have never applied for an offer in compromise in the past. Tax pros are experienced with this program. They deal with these applications on a regular basis and know how to complete them correctly.
Your last offer was rejected. A tax pro can help you review your rejected application and help you decide how to apply again.
You have a professional file your tax return. If you don’t normally prepare your own tax returns, the paperwork required for this program might be too intense for you.
You want to get the lowest offer possible. Again, a tax professional can help you find the Goldilocks spot. They can help you narrow in on an offer that is as low as possible for your budget but high enough to get accepted by the IRS.
You disagree with the tax bill. Arguing a disagreement with a tax liability can be tricky. Tax experts have intimate knowledge of the tax codes, and they use their knowledge to your advantage.
You’re tired of dealing with the IRS. The IRS can be exhausting. When you hire a tax pro, they deal with the IRS on your behalf.
Tips for Success
To improve your chances of qualifying for an Offer in Compromise:
Seek Professional Guidance: Tax experts who specialize in OIC applications understand the IRS’s evaluation criteria and can craft compelling offers tailored to your financial circumstances.
Be Thorough: Ensure all forms are completed accurately and supported by detailed financial documentation. Missing or incorrect information can lead to delays or outright rejection.
Use the IRS Pre-Qualifier Tool: Although not foolproof, this tool provides an initial indication of whether you may qualify. However, it has limitations and should not replace professional advice.
An Offer in Compromise can provide significant relief if you’re struggling with tax debt and having difficulty paying your taxes.
