An Offer in Compromise (OIC) is an agreement sometimes offered by the Internal Revenue Service (IRS) to manage tax liability. Is it the right move for you?
If you are faced with overwhelming tax debt, an OIC is a workout agreement with the IRS that can reduce and then eliminate crushing debt. By reducing the amount owed, the IRS provides taxpayers the ability to pay off a reasonable portion of their debt and make a fresh start. While it sounds good, understanding the details is important.
Consider these points when thinking about an OIC:
- You must apply for an OIC. Once you complete the pre-qualifier tool, an application form is required. Your interest in an OIC may have been piqued by a television or social media ad from businesses that advertise their services in obtaining fast tax relief for you through an OIC.
- When preparing your OIC application and offer, it is essential to work with a qualified tax attorney or professional who is not churning your business to make a quick buck. Only about 33 percent of OIC applications are accepted each year and attention to your application—and what you can truly afford to pay—is critical.
- The application process for an OIC can take as long as nine to 12 months. If you already have an installment agreement in place, you do not need to make payments while your offer is being reviewed. If your OIC is not accepted by the IRS, assuming you have not incurred further tax debt, your installments will continue without additional fees or penalties.
- The IRS does not offer OIC to give taxpayers a break. The program is aimed directly at whether the IRS believes it can ultimately collect the amount of money that you owe. If it appears the value of your assets and income are less than what you owe, the IRS can consider an OIC.
- Through a painstaking review, the IRS will calculate the value of your financial accounts, income, anticipated future income, cars, real property, and other assets. Through this process, the IRS arrives at a “reasonable collection potential (RCP).” The IRS notes that the agency will not accept an offer in compromise unless it is equal to or greater than the RCP determined by the IRS.
These are just a few points about the program. Be sure you fully understand the commitment and have the financial ability to pay an OIC. The program is out of reach for taxpayers who cannot afford the RCP set by the IRS.
Overwhelming tax debt is difficult or impossible to manage over time, financially and personally. Speak with an experienced tax lawyer about all options on the table for your particular situation. Understanding the real impacts and desirability of each strategy can help you find your best path out of debt.
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