How Does an IRS Offer in Compromise Help with Back Taxes?

Jul 29, 2010
Asa Ghaffar

Reach an IRS Tax Debt Settlement Offer - nicolekcnw

An IRS Offer in Compromise (OIC) is available to settle back taxes for a reduced amount. Reach a tax debt settlement with the Internal Revenue Service.

Owing back taxes to the Internal Revenue Service is stressful, but you can reach an IRS tax debt settlement when certain circumstances apply. An Offer in Compromise with the IRS can be used to settle tax debt for a reduced sum. However, most requests will be declined; IRS debt help for an OIC will only be granted in three specific situations.

When Will an OIC Be Accepted?

Doubt as to collectability. The IRS has reason to question whether the outstanding taxes will be collectible and an OIC provides the best chance to recover some of the money that is owed.
Doubt as to liability. There is a legitimate reason to believe that an error has been made assessing the amount of tax. This includes a mistake made by the examiner when interpreting the law, failing to consider a taxpayer's evidence or if fresh evidence has arisen.
Effective tax administration. This is applicable when the tax payer has the money to pay off back taxes, but collecting the money would exacerbate financial hardship or prove to be either unfair or inequitable.

Other Considerations to Get an IRS Tax Offer in Compromise (OIC)

Mustn't be in the process of filing for bankruptcy.
All previous tax returns must have been filled.
The appropriate IRS forms must have been completed.
A $150 application fee or Form 656-A must have been provided.

Form 656-A and the $150 Application Fee for IRS Tax Debt Settlement Help

If personal income falls below the Internal Revenue Service low income guidelines, the $150 application fee could be waived. Form 656-A includes a helpful worksheet that the tax payer can work through in order to determine whether they are eligible or not. IRS Form 656-A must be attached to Form 656 and posted to the IRS for consideration.

Internal Revenue Service OIC Payment Options

Lump sum cash offer: There are other repayment options. The most common payment option chosen is where the offer must be paid in five or fewer installments. An offer of 20% of the new amount due must be included with Form 656.
Short term periodic payment offer: The realizable value of assets and the amount the Internal Revenue Service could collect from 60 monthly payments or the statutory collection period. Payment must be made within 24 months of the IRS debt help offer.
Deferred periodic payment offer: An offer must include the realizable value of assets and a monthly payment that is equivalent to the full amount that could be collected over the statutory collection period.

Settling Back Taxes with an OIC

An OIC takes time to arrange and could be rejected. There is no obligation on them to accept an IRS tax debt settlement offer and regular repayments must be maintained during the period of investigation. It's also important to appreciate that only a small percentage of offers to settle tax debt will be accepted. Given how difficult it is to get an OIC accepted and that there are other ways of settling tax debt, it's advisable to seek advice from a professional tax advisor.