IRS Form 656- The Offer in Compromise Application:

The Internal Revenue Service (IRS) Form 656, the OIC, is a proposed contract giving the Internal Revenue Service (IRS) a definite amount of money, usually just a chunk of the entire tax debt owed by the taxpayer. You might owe $15,000, and you offer paying the IRS $7,000 instead. However, for this to be accepted, the taxpayer has to give good reasons why he or she is paying that amount.

The IRS will consent to cross out the balance of your outstanding tax obligation if it accepts your offer. The offer can also be declined, there is no guarantee because the IRS puts into consideration several factors and this determines if the request will be accepted or declined. The Offer may also be returned to the taxpayer as “unprocessable.”

The Rationale of an Offer in Compromise;

You can request an offer in compromise (OIC) for one of these reasons, and you will have to make a reasonable case for each:

 Doubt of your liability for the debt

Doubt of collectibility of tax debt

It’s “effective tax administration” because of a unique circumstance

 

Doubt as to Collectibility;

Doubt as to collectibility implies that the taxpayer is unlikely to pay the full amount of taxes owed to the IRS. It doesn’t mean the taxpayer denies actually owing the outstanding balance of tax debts. You’re making it clear to the IRS that it can try all means possible to recover the complete tax debt, but it won’t be able to get all the money because you just don’t have it. You don’t have assets you can liquidate or refinance to raise the money, and you’re unlikely to be approved for an unsecured loan.

Doubt as to collectibility is the main reason why the majority of taxpayers request an Offer in Compromise (OIC).

The alternatives to an OIC based on this reason would be arranging a long-term installment agreement   or a partial-pay installment agreement with the IRS.

Doubt as to Liability;

This means that the taxpayer doubts that he or she is to be held accountable for the outstanding balance of the tax debt. As stated earlier, for each of the basis the taxpayer will have to prove a reasonable case as to why the agency should consider his or her offer. In this case, the taxpayer must submit a statement or proper documentations showing and explaining why he or she doubts being responsible for the outstanding balance of the tax debts

Furthermore, requesting for an Offer In Compromise based on doubt as to liability can be stressful. It might be easier, faster and less expensive to find a way to resolve the underlying tax liability than seek for an OIC based on doubt of liability. The alternatives include filing an amended tax return to rectify any perceived errors, requesting innocent spouse or injured spouse relief, requesting penalty abatement, or asking for audit reconsideration.

Effective Tax Administration;

Effective tax administration implies that the taxpayer claims that some exceptional circumstance would pose a serious economic hardship to the individual if he or she were tax debt. In this case, the taxpayer feels that it would be unfair and inequitable to collect the entire balance due from you. The taxpayer does not doubt that he or she is responsible for the outstanding tax debt, or that the IRS could probably collect the full amount due if it tried.

Significant economic hardship cases would mean some sort of life or death situation, such as very serious health problems. In this case, in submitting an offer for OIC based on effective tax administration, the individual needs to provide a detailed and extensive narrative of the exceptional circumstances as well as the required documentation for the Offer in Compromise(OIC).

Effective tax administration is the least understood of all three reasons. The IRS rarely approves an offer based on effective tax administration.

Alternatives include seeking a long-term installment agreement, requesting a partial-pay installment agreement, or seeking penalty abatement based on reasonable cause.

Unprocessed Applications;

A sizeable amount of Offer In Compromise (OIC) applications are returned unprocessed because this application is missing one or more of the required documents or forms, required backup documentation, or a payment or request for a fee waiver. An offer also can’t be processed if the taxpayer is not current on his or her tax obligations.

This is a catalogue of all prerequisite for your OIC to be considered “processable” by the IRS:

You must not have an open bankruptcy case.

You must have filed all federal tax returns that you were required to file.

You must pay a $186 application fee as of 2019, or request a fee waiver.

You must submit IRS Form 656, Form 433-A, or Form 433-B, along with support documentation. Form 433-A is for individuals and Form 433-B is for businesses. Each of these forms asks for a detailed analysis of your financial situation, including your income, assets, and budget.

You must be current with estimated taxes and/or income tax withholding for the current year.

The IRS Form 433-A does not have to be submitted if an individual is requesting an OIC based entirely on doubt as to liability.

Payment Terms;

The Individual will have to indicate the payment terms for his or her Offer. These starts from the date the IRS accepts and approves your OIC:

You will make cash payment of the portion of your debt you are proposing to pay.

Request a short-term deferred payment arrangement.

Request deferred payment

You can request to pay the complete amount of your offer in compromise within 10, 30, 60, or 90 days from the date of receiving written notification that the IRS has accepted your offer. This is the preferred payment option. 

Otherwise, you can pay the full amount of the OIC within 24 months. You might specify a lump sum payment within 90 days, then monthly installment payments for up to 24 months from the date of acceptance.

Or you can pay the full amount of your OIC over the remaining life of the collection regulation of limitations. You can specify a lump sum payment due within 90 days, then monthly installment payments for the remainder of the collection period, which is normally 10 years or 120 months from the date the tax liability was finalized.

Bear in mind that this 10-year spell might have been extended or suspended by different actions taken by the IRS or even by you. Filing an OIC application automatically suspends the 10-year period while the IRS processes your request. You should negotiate with the IRS very carefully to make sure the collection period is fully defined in the terms of your offer agreement—or better yet, hire a qualified tax professional to do so for you.

You must also indicate to the IRS how you’re going to pay the amount you’re proposing. For example, you can say that you plan to sell your land or house, or that you intend to refinance your mortgage.

If Your Offer Is Accepted;

The offer in compromise is a contract between you and the IRS, so you should read IRS Form 656 very carefully before you sign and submit it. The OIC contract sets forth your responsibilities. The IRS can and probably will revoke your offer and reinstate the full amount of your original tax debt if you fail to comply with any of the contractual provisions