Facing a mountain of IRS tax debt can feel overwhelming. An IRS settlement offer, officially known as an Offer in Compromise (OIC), can be a lifeline. It lets you settle your tax debt for less than the full amount.
An OIC is an agreement between you and the IRS. It settles your tax liability for a lower amount than what you originally owed. However, it isn’t available to everyone.
Several factors determine OIC eligibility. Your financial situation is key, as the IRS usually approves an OIC when the offer represents the most they can collect within a reasonable timeframe.
This considers your ability to pay, income, expenses, and asset equity. You also must have filed all required tax returns and be current on federal tax deposits if you are an employer responsible for quarterly federal tax returns.
The Offer in Compromise Pre-Qualifier Tool can help confirm eligibility and create a preliminary proposal. But approval isn’t guaranteed.
There are different OIC types based on your reason for applying. The first is Doubt as to Liability. This applies if you dispute owing the tax or the amount.
You’ll use Form 656-L with an explanation and evidence to support your dispute, for your IRS settlement offer. No application fee is required for Doubt as to Liability. The second is Doubt as to Collectability. Use this option if you can’t afford the total tax. You must submit IRS Forms 656 and 433-A, with an application fee. This option can be a part of an installment agreement request for an IRS tax, even for international taxpayers. A final type of OIC is Effective Tax Administration. Though it applies less often, this can be applied if there would be an excessively unfair or extreme burden due to unusual or extreme circumstances, even if you could afford to pay.
Applying for an IRS settlement offer requires gathering documentation and managing your installment agreement.
Generally, file Form 656, the Offer in Compromise form, and include financial details. Also use Form 433-A (individuals) or 433-B (businesses), along with your amended return, which you can complete with direct deposit. You might also need extra documentation to complete your irs settlement offer application, according to rules governing practice. Consider factors such as child tax credit amounts, clean energy vehicle credits, retirement plans, or the standard deduction.
A $205 application fee applies unless you meet the low-income criteria. Payments follow either a Lump-Sum Offer (20% minimum upfront with your offer payment) or a Periodic Payment Offer (monthly payments).
An offer payment, along with other electronic federal tax payments can be made. You can access additional resources, such as checking your return status, finding tax pros, making an estimated tax payment, or amending/fixing your return on the IRS website.
Low-income certification eliminates fees and initial payments. Eligibility exists if your adjusted gross income is below 250% of the federal poverty guidelines.
Annual household income (HHS Guidelines) below that same threshold also qualifies. You can verify this information from the IRS guidelines for the relevant tax year.
After sending your OIC to the designated IRS location, allow 6–24 months or more for processing. The IRS might file a Notice of Federal Tax Lien while reviewing your offer, using Form 656. They examine your income, expenses, assets, and equity to ensure a correct tax record. Form 656-L addresses Doubt as to Liability when ability to pay is not in question, instead pertaining to the liability for the IRS settlement offer.
Cooperate fully, promptly providing requested information. This level of care applies even for international taxpayers or those engaged with tribal governments and local governments about matters such as tax exempt bonds.
The IRS places high importance on these matters. Severe penalties, like the ones imposed on promoters in a syndicated tax case can happen (details at the DOJ Site). It’s best to fully comply and provide all requested documentation.
You have 30 days to appeal a rejection with Form 13711 or a separate letter. The Independent Office of Appeals manages the appeal process. The Taxpayer Bill of Rights provides further guidance.
An IRS settlement offer (OIC) can provide relief from significant tax debt for those who qualify. It can be a fresh start. Qualifying has specific requirements and takes time and cooperation.
Understand the process before applying for an irs settlement offer. Proactive planning can give you the best chances of obtaining relief and managing individual tax more effectively. Take the necessary steps to determine your eligibility, complete the forms properly, and engage with the process in good faith to seek relief from federal tax.
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