An Offer in Compromise (OIC) is an offer made by a taxpayer to settle a tax liability for less than the full amount owed. When you hear “tax forgiveness” or “pennies on the dollar” ads on the radio or on TV, the advertiser is referring to an OIC.

An OIC is a legitimate option if you cannot pay the full tax liability or doing so creates a financial hardship, but it must be handled with care. Hiring a professional team, like the one at Sunshine Tax Relief, is strongly recommended. Read on for a high-level review of the pros and cons of an OIC.

Facts and circumstances considered by the IRS include:

• Ability to pay
• Income
• Expenses
• Asset equity
• Future earning potential

The IRS will usually approve an OIC when the amount offered represents the most the IRS can expect to collect within a reasonable period of time. The ultimate goal is a compromise that suits the best interests of the taxpayer and the IRS. Submitting an offer application does not ensure that the IRS will accept the offer. It begins a process of evaluation and verification. Generally, the IRS will not accept an offer if the tax debt can be paid in full via an installment agreement or lump sum payment.

Am I eligible for an OIC?

Before the IRS can consider an offer, the taxpayer must be current with all filing and tax payment requirements and cannot be in an open bankruptcy proceeding. Additionally, you must have received a bill from the IRS for at least one of the tax debts on your offer. Lastly, the IRS can’t process your offer if the IRS referred your case, or cases, involving all of the liabilities identified in the offer to the Department of Justice.

How much money should I offer?

The amount of your offer depends on your financial data, which Sunshine Tax Relief gathers through an in-depth financial analysis. The IRS will look at your “Reasonable Collection Potential” (RCP), which considers your monthly disposable income and your net equity in assets. This is not an arbitrary number; it is based on a mathematical formula that is calculated after your financial data is analyzed.

If I am eligible for an OIC, how does the process start?

If your financial analysis indicates that you are a candidate for an OIC, Sunshine Tax Relief will remit the following to the IRS on your behalf:

• One or more of the Form 656 series
• One or more forms from the Form 433 OIC series
• Several months worth of substantiation for all relevant items listed on the appropriate Form 433
• The nonrefundable $205 application fee (paid by you), unless a low-income certification is met
• The nonrefundable initial offer payment (paid by you), unless a low-income certification is met
• Any other information required by the IRS (typically only applies where a Revenue Officer is involved)

Do I have to submit a payment to the IRS when Sunshine Tax Relief files my OIC?

Yes. Here are the two payment options you have:

1) Lump-Sum Cash: This option requires that you pay 20% of your total offer amount (like a down payment) with your OIC submission. If your offer is accepted, the remaining balance of your offer amount must be paid within five months of the acceptance of the offer. The 20 percent payment is generally nonrefundable, meaning it won’t be returned to you even if the offer is rejected or returned to the taxpayer without acceptance. Instead, the 20 percent payment will be applied to your tax liability.

2) Periodic Payment: This option requires that you make a payment with the offer, and the remaining balance of the offer is paid within six to 24 months. The monthly payments must be paid timely while the offer is being considered. The monthly payments do not have to be equal; the first 23 can be low, with a balloon payment at the end.

What happens after Sunshine Tax Relief submits my offer?

The IRS will send you a “processibility” letter within 90 days. This means that your offer is proceeding to the next phase in the IRS’s determination process. If the letter is not received in 90 days, it is recommended that you reach out to the Taxpayer Advocate.

While the offer is being evaluated:

• The nonrefundable payments and fees will be applied to the tax liability (the taxpayer can designate how the payments are applied)
• A Notice of Federal Tax Lien may be filed
• Penalties and interest will continue to accrue
• Other collection activities are suspended
• The legal assessment and collection period is extended
• All required payments associated with the offer must be made
• If the periodic payment plan option was selected, the monthly payments must be made unless low-income certification is met
• Continue to timely file and pay all required tax returns, estimated tax payments, and federal tax payments
• Existing installment agreement payments are not required to be made
• The offer is automatically accepted if the IRS does not make a determination within two years of the IRS receipt date

My offer was accepted! What’s next?

• If the IRS accepts your offer, you will have to agree to fully comply with the tax laws going forward
• In most cases, the IRS will keep any refund, including interest, that might be due for tax returns filed through the date the IRS accepts the offer
• The lien will be released if your offer amount has been paid in full. This can take 120 days (or longer, in some cases)
• You waive your right to contest the liability in court
• If you don’t abide by all the terms and conditions of the OIC, the IRS may determine that the OIC is in default. For most OICs, you are required to timely file all tax returns and timely pay all taxes for five (5) years from the date of acceptance of the OIC. No installment agreements will be allowed
• If the IRS terminates your OIC for noncompliance, the agreement is no longer in effect and the IRS may then collect the amounts originally owed (less payments made), plus interest and penalties. Liens and levies may occur

Certain offer information is available for public review by requesting a copy of a public inspection file. The IRS is required to make certain information, such as taxpayer name, city/state/zip, liability amount, and offer terms available for public inspection and review for one year after the date of acceptance.

Is an OIC right for you? Reach out to Sunshine Tax Relief to learn more.