You Might Qualify to Pay Your Tax Debt for Less Than You Owe
Sometimes, you just can’t afford to pay your tax debt. Fortunately, there are ways to get those collection calls from the IRS to stop. The IRS offers a variety of programs meant to help taxpayers get caught up on their taxes.
Occasionally, the IRS allows taxpayers to settle their tax bills for less than the full amount of back taxes owed. This is called an offer in compromise (OIC).
A tax lawyer from The W Tax Group can help you decide if an OIC is right for you. If so, we’ll help you negotiate with the IRS to settle your tax bill for as little as possible. If not, we’ll help you find the best resolution option for your tax situation. To help you out, here is an overview of the requirements and timeline for an OIC.
What Is an Offer in Compromise (OIC)?
An offer in compromise is when the IRS agrees to settle your tax liabilities for less than you owe. In most cases, you must pay the offered amount in a lump sum, but in some cases, you can take up to 24 months to pay off the offer.
To determine if you qualify, the IRS looks closely at your unique financial situation. Some of the items the IRS considers when deciding whether you will qualify, include the following:
- Your income.
- Your ability to pay your taxes in full.
- Asset equity.
- Your expenses.
- Your debts.
With certain types of offers, the IRS also considers if you actually should be liable for the tax and if it’s fair to hold you responsible. There is more information on the different types of offers in the following sections.
When you apply, you must provide the IRS with detailed information about your situation. To ensure the best chances of approval, you may want to work with a tax professional.
Am I Eligible for an IRS Offer In Compromise?
There are many eligibility requirements for an IRS OIC. Understanding the OIC requirements can be difficult, so it’s usually helpful to have a tax professional review your tax situation to see if you’re eligible.
Here are some of the general eligibility requirements for the IRS offer program:
- You must have received a bill regarding at least one of the tax liabilities you’ve included in your offer.
- You must have filed the appropriate tax returns.
- You must have made all required estimated tax payments during that year.
- You must not be reasonably capable of paying your tax bill in full.
- You must not be in an active bankruptcy case.
How to Apply for an Offer in Compromise
To apply for an offer in compromise based on doubt as to collectibility, you must submit the following forms to the IRS:
- Form 656 (Offer in Compromise)
- Form 433-A (Collection Information Statement for Wage Earners and Self-Employed Individuals)
- Form 433-B (Collection Information Statement for Businesses)
You use Form 656 to make the offer in compromise. Then, you use Form 433-A to tell the IRS about your personal financial situation, and if applicable, you detail your business finances on Form 433-B. These forms are extremely detailed, and you must include financial documents to back up your claims.
Finally, you need to include a $205 application fee (as of 2022). If you’re offering to pay off the taxes in a lump sum, you should include a 20% downpayment, and if you’re asking for a periodic payment offer in compromise, you should include your first monthly payment.
Taxpayers with low incomes don’t have to pay the application fee or include a downpayment with their applications. The instructions for Form 656 have an income chart that can help you see if you qualify for low-income status.
Note that if you apply for an IRS offer based on doubt as to liability, you should use Form 656-L, and you don’t have to include the financial disclosures or pay the application fee.
What Happens If the IRS Accepts Your Offer in Compromise?
While reviewing your offer to reduce your tax debt, the IRS may request additional information. Make sure you respond to these requests promptly, or the IRS will reject your offer and you will not be able to appeal.
The IRS will notify you in writing if your offer in compromise is approved. If your IRS offer is approved, you get to pay off your taxes for less than you owe. With lump-sum offers, you have five months to make the payment. With periodic payment offers, you make monthly payments for between six and 24 months.
In most cases, the IRS will also keep any refunds you earn for the tax year the offer was accepted. For instance, if your offer is accepted in 2022 and you file your 2022 return in April 2023, the IRS can keep that refund. This amount does not reduce how much you have to pay for your offer in compromise.
For the next five years, you must stay compliant with tax filing and payment obligations. If you don’t file or pay your taxes during that time frame, the IRS has the right to rescind your offer and demand payment for the full tax liability.
What Happens If the IRS Rejects Your Offer in Compromise?
The IRS will notify you in writing if your offer is rejected. The IRS will keep the downpayment you made and apply it to your tax bill. Then, you will still owe the remaining amount.
At this point, you need to act quickly to make other arrangements on your tax bill. Our tax attorneys can help you choose the best option for your situation.
If you disagree with the IRS’s decision, you can appeal the rejected offer in compromise. You must start the appeal within 30 days of receiving the rejection on the offer.
Types of Offers in Compromise & Requirements
The IRS offers three types of offers in compromise. When you contact a tax attorney, they can let you know which of these offers in compromise are right for your situation.
Doubt as to Collectibility
This is the traditional way to pay off your tax debt for less than you owe. This tax resolution program is for people who can’t afford to pay both their tax debt and living expenses. To apply, you need to file Form 656. Individuals also need to file Form 433-A OIC to prove that they’re experiencing economic hardship, and businesses must file Form 433-B OIC.
You must be low-income to qualify. The IRS will only accept offers that are close to your reasonable collection potential. Reasonable collection potential refers to the amount the IRS would be able to reasonably collect on your federal tax bill. In addition to looking at your current financials, the IRS also takes into account your future income.
Doubt as to Liability OIC
An OIC based on doubt as to liability doesn’t focus on whether or not you can pay your living expenses and your tax debt. Instead, this tax resolution option is for situations where there is a legitimate doubt that you owe the taxes. You can apply for doubt as to liability using Form 656-L.
However, in most cases, the tax law requires you to apply for another tax resolution program first. For instance, you may need to apply for innocent spouse relief first and then, if you’re not accepted, you can move on to this option. Check out our guide to doubt as to liability and how to file Form 656-L to learn more.
Effective administration is when the IRS agrees to lower your tax bill to be equitable. You don’t have to be low-income, and you don’t have to doubt that you owe the tax. This OIC program is designed for situations where it would be unfair or unreasonable to enforce the tax law and make you pay your federal tax bill.
Submitting an OIC request for effective tax administration requires the same paperwork as applying for doubt as to collectability. You still have to make a financial disclosure and generally, you must pay an application fee. You also need to explain why collecting the tax would be inequitable. This program is primarily for people who are struggling with illnesses or other serious matters. A tax lawyer can give you an idea of whether or not you meet the requirements.
IRS Offer in Compromise Time Frame
Wondering about the time frame for applying for an OIC? The exact timing can vary based on your situation, but here is an example of what you might expect to happen.
- Today — Contact a tax lawyer for an initial consultation. They will give you an overview of the time frame to expect for your situation.
- One to Two Weeks — During this time, you will gather financial and tax documents, and the tax attorney will start to prepare Form 656 and other application documents. Of course, you can take more time if you need it, but you should act quickly to prevent any additional collection actions against you.
- Six Months — Once you submit the offer, the IRS usually takes about six months to review it. However, this can vary drastically depending on your situation and the IRS’s backlogs when you apply.
- 30 Days After Rejection — If the IRS rejects your offer, you have 30 days to appeal. The IRS won’t engage in any enforced collection actions for 30 days so you can take this time to make other arrangements if you don’t want to appeal.
- Five Months After Acceptance — If the IRS accepts your offer to make a lump sum payment, you must do so within five months of acceptance.
- 24 Months After Acceptance — If the IRS accepts your offer for an OIC with payments, you make the payments over a 24-month period.
- Five Years After Acceptance — The terms of most OICs stipulate that you must stay compliant with tax payment and filing obligations for five years after you get an OIC. If not, the IRS may be able to revoke the agreement and demand payment in full.
Again, however, this time frame can vary depending on your situation. Sometimes, it takes a year for the IRS to review an offer. In other cases, the agency may complete the review faster.
The Cost of an Offer in Compromise
Wondering how much it costs to apply for an OIC? The total cost can vary, but you should be ready to pay the following:
- The OIC application fee — You must pay a fee unless you qualify for a low-income fee waiver or you’re applying for doubt as to liability.
- The initial payment — Some OIC programs require you to send a downpayment with your offer.
- The rest of the offer payment — You must pay the remainder of your offer in a lump sum or in payments over two years. Typically, the total is higher if you choose to pay over time.
- Tax lawyer fees — A tax lawyer handles the process for you, and their experience helps to reduce the chance of rejection. They also ensure you get the lowest offer possible. They usually save people money in the long run.
Your total OIC cost will vary based on how much you owe in federal tax, your reasonable collection potential, and the complexity of your taxes and finances. A lawyer can help you understand what to expect.
How Much Do Tax Lawyers Charge for an Offer in Compromise?
Considering that only 30% of offer in compromise filings are accepted, it is generally in your best interest to hire an experienced offer in compromise professional to assist. A good tax professional will do an in-depth financial analysis of your situation to determine your qualification and will only suggest an offer in compromise if you meet the strict guidelines.
Generally, the fees to a tax professional to file an offer in compromise range from $3,000 to $6,000, depending upon the situation’s complexity. If there are years of unfiled tax returns, this can also add to the price. You can read this guide here on finding a qualified attorney to help with an offer in compromise.
Can You Get an Offer in Compromise on State Taxes?
Tax laws vary from state to state. Our tax attorneys can help you determine if you may qualify for an offer in compromise on your state taxes.
If you have Michigan state back taxes, you are in luck — The Michigan Department of Treasury does have an offer in compromise program. If you qualify for a MI offer in compromise, you may be able to settle your tax liability for less than you owe.
Our Tax Team Can Help with Your Offer in Compromise
Completing the necessary tax filings and applications for an offer in compromise on your own is entirely possible, however, it is complicated and can take a considerable amount of time and tax knowledge.
If you believe you might be eligible for an offer in compromise, contact the W Tax Group to review your circumstances. With our free tax case review, we can evaluate your finances and other eligibility requirements to see whether you qualify for this IRS program to settle your back taxes.
To learn more, call us directly right now at 877-500-4930 or submit a consultation request.
Benefits of Working with The W Tax Group
We have processed thousands of IRS tax cases, and we have saved hundreds of millions of dollars in tax relief for our clients. Here are the benefits of working with our office to resolve your back taxes:
- We deploy in-house licensed tax attorneys, CPAs, and business tax professionals to help our clients.
- You will have a dedicated case manager so you are never alone and never in the dark.
- After your free consultation, if you choose to use our services, we offer a 15-day money-back guarantee.
- We know money may be tight, so we offer affordable payment plans for our service fees.
- We are respectful and always keep your conversations confidential.
- We have hundreds of five-star customer reviews.
- We are licensed to work in every state in the nation.
- Our initial consultations are always 100% free.
To learn more, check out the The W Tax Group Services FAQ where we answer the most common questions our customers have.