An Offer in Compromise (OIC) is a program offered by the Internal Revenue Service (IRS) in the United States that allows taxpayers who are unable to pay their tax debts in full to settle their tax liabilities for less than the full amount owed. If you want to understand it in the simplest of terms - An OIC is a legal agreement between you and the IRS, whereby the IRS agrees to accept a reduced amount of your tax debt as payment in full.
To qualify for an OIC, you must demonstrate that you are unable to pay your tax debts in full and that accepting an OIC is in the best interests of both you as a taxpayer and the government.
However, not everyone is eligible for an offer in compromise. Here are some of the eligibility requirements:
The taxpayer must be in compliance:
Before submitting an OIC, the taxpayer must have filed all required tax returns and made all required estimated tax payments for the current year.
Ability to pay:
The IRS will evaluate the taxpayer's ability to pay based on their income, expenses, and assets. The taxpayer must demonstrate that they cannot pay their tax liability in full through installment agreements or other payment options.
Reasonable Collection Potential:
The IRS will calculate the reasonable collection potential (RCP) of the taxpayer. This calculation is based on the taxpayer's future income, expenses, and assets. If the IRS determines that the taxpayer's RCP is greater than the amount offered in the OIC, the OIC will not be accepted.
Doubt as to liability or doubt as to collectibility:
The taxpayer must prove either that there is a genuine dispute about the amount of tax owed (doubt as to liability) or that there is no way they can pay the full amount of tax owed (doubt as to collectibility).
Compliance with payment and filing requirements:
The taxpayer must comply with all payment and filing requirements for the five years following the acceptance of the OIC.
Submitting an OIC involves submitting a detailed financial statement to the IRS, along with an offer to pay a specific amount to settle the tax debt. The IRS may accept, reject, or counter the offer based on their analysis of your financial situation.
Filling out an offer in compromise form can be a valuable option for you if you're facing financial hardship, but it should not be entered lightly. You should consult with a qualified tax professional before submitting an OIC, as there may be other options available that may be more beneficial.