Understanding the IRS Offer in Compromise: Your Path to Tax Relief

Key Takeaways

• The Offer in Compromise (OIC) allows taxpayers to settle tax liabilities for less than the full amount owed.
• Eligibility requires filing all tax returns, making necessary payments, and demonstrating an inability to fully pay the tax debt.
• The OIC program benefits both the taxpayer and the government by establishing a mutually agreeable debt settlement.
• Taxpayers can choose to pay the offer amount in a lump sum or through installment payments.
• Accepted offers require compliance with agreement terms, including timely filing and payment of taxes for five years.

Dealing with tax debt can feel overwhelming, especially when the full amount owed to the Internal Revenue Service (IRS) in Dallas, TX seems impossible to pay. If you’re struggling financially, you may qualify for an IRS Offer in Compromise (OIC)—a solution that allows taxpayers to settle their tax liability for less than the full amount they owe.

In this guide, we’ll explain what an Offer in Compromise is, who qualifies, how the application process works, and why this IRS program could be the relief you need.

What Is an IRS Offer in Compromise?

An Offer in Compromise is an agreement between a taxpayer in Dallas, TX, and the IRS to resolve a federal tax debt for less than the full amount owed. The OIC program is designed for individuals and businesses that cannot fully pay their taxes due to economic hardship or special circumstances.

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This compromise provides a potential path forward for both wage earners and self-employed individuals facing large tax bills.

Unlike installment payments or temporary holds, an OIC permanently reduces your tax liability. Once the taxpayer's offer is accepted and paid according to the terms, your debt is considered settled.

Who Qualifies for an Offer in Compromise?

To qualify for the Offer in Compromise (OIC) program, taxpayers must adhere to specific eligibility requirements set by the Internal Revenue Service (IRS). These criteria ensure that only those genuinely unable to pay their full tax liabilities can benefit from the program.

Up-to-Date Tax Filing Status in Dallas, TX

The taxpayer must be current with all tax return filings. This means that all required tax returns for the relevant tax periods must be filed before submitting an OIC application. This ensures that the IRS has a complete understanding of the taxpayer's financial situation and tax liabilities.

Absence of Open Bankruptcy Proceedings

Taxpayers currently involved in an open bankruptcy proceeding are not eligible for the OIC program. The IRS requires that any bankruptcy cases in Dallas, TX be resolved before considering an offer in compromise, as these proceedings take precedence over tax debt negotiations.

Who May Be Disqualified

When applying for an IRS Offer in Compromise (OIC), it's crucial to understand the factors that may disqualify a taxpayer from being eligible for this program. Here are some key disqualifying conditions:

Low-Income Taxpayer Not Current with Filings

A low-income taxpayer in Dallas, TX must ensure that all tax return filings are up-to-date before submitting an OIC application. Failure to comply with this requirement may result in disqualification. The IRS needs a complete and accurate picture of the taxpayer's financial situation, which is only possible with current filings.

Open Bankruptcy Proceedings

Taxpayers involved in an open bankruptcy proceeding are automatically disqualified from applying for an OIC. The IRS prioritizes resolving bankruptcy cases before considering an offer in compromise, as these legal proceedings take precedence over negotiations related to tax debt.

Failure to Make the Required Initial Payment

The OIC application process requires an initial payment, which is nonrefundable. If a taxpayer fails to make this payment, their application will not be considered. It is essential to understand that this initial payment demonstrates the taxpayer's commitment to settling their tax liabilities.

Unresolved Business Taxes or Multiple Tax Periods

Taxpayers with unresolved business taxes or issues spanning multiple tax periods may face disqualification. The IRS requires that all business tax obligations and multi-period issues be addressed before considering an OIC. This ensures that the taxpayer is making a genuine effort to resolve all outstanding tax liabilities.

By understanding these disqualifying factors, taxpayers can better prepare their OIC applications and increase their chances of being accepted into the program. It's important to address any potential issues before applying to avoid unnecessary delays or rejections.

Submission of Required Financial Documentation

Applicants must provide comprehensive financial information, including details about their assets, income, expenses, and overall ability to pay the tax debt. This documentation helps the IRS assess the taxpayer's financial situation and determine whether they qualify for a compromise based on economic hardship or special circumstances.

The IRS evaluates various factors such as income, household size, and allowable living expenses to decide if the taxpayer meets the eligibility criteria. This thorough assessment ensures that the OIC program is reserved for those who genuinely need relief from their tax liabilities.

By understanding and meeting these qualification criteria, taxpayers increase their chances of successfully negotiating an offer in compromise with the IRS, potentially settling their tax debt for less than the full amount owed.

Types of Compromise Based on Circumstances

The IRS may approve an offer in compromise under the following categories:

Doubt as to Collectability

This category applies when the taxpayer does not have the means to pay the full tax debt now or in the foreseeable future. The IRS considers the taxpayer's income, expenses, and asset equity to determine if they can collect the full amount. If the taxpayer's financial situation indicates that the full payment is unlikely, the IRS may accept an offer that reflects the taxpayer's true ability to pay. This ensures fairness and provides a realistic solution for those genuinely unable to meet their tax liabilities.

Doubt as to Liability

In cases where there is legitimate uncertainty about the accuracy of the tax liability, the IRS may consider an offer in compromise. This category is applicable when the taxpayer believes that the tax assessment is incorrect or that they do not owe the amount stated. The taxpayer must provide evidence supporting their claim, such as documentation or legal arguments, to demonstrate that the assessed tax liability may not be accurate. This allows taxpayers to address disputes over tax assessments and potentially settle for less than the claimed amount.

Effective Tax Administration

The IRS may accept an offer under this category when a taxpayer submits a reasonable offer, but paying the full amount would result in economic hardship due to special circumstances. This category is reserved for situations where the taxpayer can technically pay the full tax debt, but doing so would create an undue financial burden. The IRS evaluates factors such as age, health, and unique financial situations to determine if accepting a lesser amount is justified. This ensures that the tax system remains compassionate and fair, particularly for those facing extraordinary challenges.

Benefits of the IRS Offer in Compromise

Settle for Less Than the Full Amount

Your tax debt could be resolved for a fraction of what you owe. This compromise based on your actual ability to pay ensures fairness for the taxpayer and the IRS.

Stop Collections and Reduce Stress

Once your OIC package is received, most collection efforts pause, giving you time to breathe while your offer is evaluated.

Achieve a Fresh Start

An accepted offer provides closure. As long as you comply with the terms, including staying current with future taxes, the settled amount is final.

How to Apply for an Offer in Compromise

To start the application process for an IRS Offer in Compromise, the taxpayer in Dallas, TX must submit several crucial documents and payments:

• Form 656: This is the formal OIC application form, which officially begins the process of negotiating a settlement for your tax debt.
• A financial disclosure form: Depending on your situation, you will need to complete either Form 433-A (OIC) if you are an individual or Form 433-B (OIC) if you are submitting on behalf of a business. These forms require detailed financial information, including income, expenses, and assets, to help the IRS assess your ability to pay.
• The application fee: This is a mandatory fee required to process your OIC application, although it may be waived for low income taxpayers who meet specific IRS criteria.
• The initial payment: This nonrefundable payment is a critical part of the application process. It demonstrates your commitment to resolving your tax liabilities and must accompany your OIC submission. This payment will be applied toward your offer amount if your OIC is accepted.

Submitting the required documents and payments is essential to demonstrate your commitment to resolving tax liabilities and increases the likelihood of your offer being considered by the IRS. Accurate completion of forms and inclusion of the correct payment can lead to acceptance, allowing you to settle your tax debt for less than the full amount owed.

Payment Options Explained

Lump Sum Payment Option

The Lump Sum Payment Option allows taxpayers to settle their tax debt by paying 20% of their preliminary offer amount upfront. This initial payment is a demonstration of the taxpayer's commitment to resolving their tax liabilities. The remaining balance of the offer is then paid in five or fewer installments, which must be completed within five months. This option is ideal for those who have access to sufficient funds to make a substantial upfront payment, as it provides a quicker path to resolving tax debt and achieving financial relief. By choosing the lump sum payment option, taxpayers can potentially expedite the acceptance of their offer and minimize the duration of their financial obligations.

Periodic Payments Option

The Periodic Payments Option offers more flexibility for taxpayers who may not have the means to make a large upfront payment. Under this option, the taxpayer pays the offer amount over a span of 24 months through installment payments. While the IRS reviews the offer, the taxpayer must continue making these payments according to the agreed schedule. This option provides a manageable way to settle tax debt over time, making it suitable for individuals who need to spread out their payments due to financial constraints. By adhering to the periodic payments plan, taxpayers demonstrate their willingness to fulfill their obligations, which can positively influence the IRS's decision on their offer in compromise.

Remember: The IRS will not refund your initial payment, even if your offer is rejected.

What Happens After You Submit an Offer?

Once the taxpayer submits an Offer in Compromise, the Internal Revenue Service (IRS) begins a detailed review of your OIC package. Here’s what to expect during this critical phase:

IRS Review Timeline

The IRS typically takes between 6 to 24 months to evaluate an offer. However, if no decision is made within two years from the date the application is received, the offer is automatically accepted, unless you’re in an open bankruptcy proceeding.

During this time:

• You must remain current with all future tax filing and payment obligations
• You must avoid acquiring new federal tax debt
• You may be contacted to provide additional financial information or clarify discrepancies

Temporary Suspension of Collection Activities

While your Offer in Compromise is under review, the IRS will generally pause all collection actions, such as wage garnishments, bank levies, and tax liens. This relief provides much-needed breathing room for the taxpayer in Dallas, TX.

Possible Outcomes

Accepted Offer

If your offer is approved, the IRS will send an acceptance letter detailing your next steps. You must adhere to the agreed payment option, whether it's a lump sum or installment payments. It's crucial to remain compliant with all tax obligations for the next five years, as failure to do so can void the agreement between you and the IRS. This means you must timely file and pay any taxes due during this period to maintain the benefits of the accepted offer.

Rejected Offer

If your offer is denied, you will receive a rejection letter outlining the reasons for the denial. Upon receiving this letter, you have 30 days to file an appeal. It's important to act within this timeframe to contest the decision. In some instances, you may improve your chances of approval by submitting a new preliminary offer, accompanied by revised financial information and updated required documentation. This approach can demonstrate your commitment to addressing the IRS's concerns and potentially lead to a successful offer in compromise.

Important Notes

Your initial payment and application fee are nonrefundable, even if the IRS denies your offer. This means that once you submit your offer, the money paid for the application and initial payment is not returned, regardless of the outcome. If you opt for the periodic payments option, it's important to continue making these payments while your offer is under review, unless instructed otherwise by the IRS. This ensures that you remain compliant with the terms of the offer process and demonstrates your commitment to resolving your tax liabilities. Maintaining these payments can also positively impact the IRS's perception of your financial responsibility and willingness to settle your tax debt.

Should You Work With a Tax Professional in Dallas, TX?

While you can complete the OIC package on your own, working with a qualified tax attorney in Dallas, TX  or an enrolled agent increases your chances of a successful result. They can ensure your financial information is accurate and that your taxpayer's offer is realistic and well-supported.

This is especially important for self-employed individuals, those with complex business taxes, or taxpayers applying under effective tax administration grounds.

Final Thoughts: A Real Solution for Tax Debt

If you're facing serious tax debt, an IRS Offer in Compromise may be your best opportunity to resolve it fairly. This agreement between a taxpayer and the IRS is designed to match what you can pay, not what you owe in full.

Not everyone qualifies, but if you do, it can make a massive difference in your financial future.

Get Expert Assistance with Your IRS Offer in Compromise at Margolies Law Office

At Margolies Law Office, we spe cialize in navigating the complexities of the IRS Offer in Compromise program. Our experienced team is dedicated to helping you achieve financial relief by determining your eligibility, ensuring all required documentation is accurately submitted, and representing you throughout the entire process.

Contact Margolies Law Office today to see if an Offer in Compromise could help resolve your tax debt and secure financial stability, with our experienced team guiding you through the entire process.

Frequently Asked Questions

1. Is an IRS Offer in Compromise a good idea?

An IRS Offer in Compromise can be a beneficial option for taxpayers who are unable to fully pay their tax debt due to financial hardship. It allows them to settle their tax liabilities for less than the full amount owed. An OIC can be a compromise based on economic hardship or specific public policy considerations. However, it’s important to consider the potential downsides, such as the requirement to comply with all tax filing and payment obligations for five years after acceptance, and the possibility of the IRS rejecting the offer.

2. How much will the IRS usually settle for?

The amount the IRS will settle for through an Offer in Compromise depends on the taxpayer’s ability to pay, income, expenses, and assets. The IRS evaluates the taxpayer's assets to determine their ability to pay, including the value of real property and bank accounts. There is no fixed amount or percentage, as each case is unique. Taxpayers can use the OIC Pre-Qualifier tool to estimate their preliminary offer amount and determine if they are eligible for an OIC.

3. Who qualifies for the IRS Fresh Start Program?

The IRS Fresh Start Program is aimed at helping taxpayers who are struggling with tax debt. To qualify, taxpayers must be current with all tax filings, have made all required estimated tax payments, and demonstrate an inability to pay their tax liabilities fully. Self-employed individuals must complete Form 433-A when applying for an Offer in Compromise (OIC). The program is particularly beneficial for those experiencing economic hardship or special circumstances.

4. What is the minimum payment the IRS will accept?

The minimum payment the IRS will accept in an Offer in Compromise depends on the taxpayer’s financial situation. The IRS evaluates the offer based on the taxpayer’s reasonable collection potential (RCP), which considers their income, expenses, and assets. The offer must reflect the taxpayer’s true ability to pay, and the IRS will not accept an offer that is less than what they can reasonably collect. However, the IRS may accept less than full payment if paying in full would cause serious hardship.

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