Introduction to Offer in Compromise (OIC)

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The Internal Revenue Code authorizes the Internal Revenue Service to accept a tax settlement that is lower than the liability that is owed. The IRS does this through their Offer In Compromise (OIC) program.

Although not for everyone, This type of IRS relief program can under the right circumstances be the perfect solution to an IRS tax debt.

Even though a person can prepare and submit their own OIC, it is really advisable to hire an experienced tax professional to prepare and submit an IRS Offer in Compromise for you. There are simply too many things that can go wrong when a person attempts to represent themself before the Internal Revenue Service.

Types of IRS Offers in Compromise

There are three types of IRS Offers in Compromise, Doubt as to Liability, Effective Tax Administration and Doubt as to Collectibility. 

 A Doubt as to Liability Offer in Compromise will be accepted when there is a doubt as to whether all or part of the tax liability is owing. A Doubt as to Liability offer in Compromise is submitted on Form 656-L. Forms 433-A or B are not required to be submitted but you cannot submit a Doubt As To Liability Offer at the same time you are submitting a Doubt As To Collectibility or Effective Tax Administration offer. There are some alternative procedures in the IRS for dealing with liability issues instead of submitting a Doubt as to liability offer. See the instructions for Form 656L under Alternatives to a Doubt as to Liability OIC for some examples. This type of offer is not routinely submitted and no more time will be spent here discussing it.

An Effective Tax Administration Offer in Compromise can be submitted when there is no dispute as to whether the tax is owing and there is the ability to pay the tax in full. To submit an Effective Tax Administration offer, you must show that even though you have the ability to pay the tax in full to do so would create an economic hardship or would be unfair or inequitable. An example might be a retired person with assets which if liquidated would pay the tax but to do so would leave him or her without adequate income to support him or her self.

 Form 433-A (OIC) must be submitted along with verification of your income and expenses. The offer in Compromise is submitted on Form 656. be sure and check the box for Effective Tax Administration. You will also need to complete the section explaining your special circumstances and why paying the tax would create an economic hardship or would be inequitable.

A Doubt as to Collectibility OIC will be accepted when the IRS feels that the tax liability could not be collected through the normal collection process such as an installment agreement or liquidating or borrowing from assets. Forms 433-A (OIC) and if self employed operating as a corporation, LLC or partnership, 433-B (OIC) must be submitted along with financial documentation for verification purposes. This is the type of IRS Offer submitted the most.

In order to be eligible to submit any type of IRS settlement, certain conditions must be met. If you are in a bankruptcy proceeding your offer will not be processed and will be returned. Wait until you receive your bankruptcy discharge before you submit an offer.

All of your tax returns must be filed. This includes Individual Forms 1040, all payroll tax returns, partnership and corporate returns.

In addition, if you are required to make estimated tax payments, they must be paid up to date. If you own a business, all payroll tax deposits must be current.

You must remain current on all required return filings and tax deposits while your offer is being investigated. Not being in compliance with return and tax deposit requirements is one of the main reasons offers are returned without being investigated.

Also, you must comply with all federal tax filing and paying requirements for a period of five years following acceptance of your offer or until the offer is paid in full, which ever is longer. This includes making required estimated tax payments and federal payroll tax deposits.

There is a $150.00 application fee that must be submitted with an OIC. You must also submit 20% of the offer amount if you are submitting a lump sum cash offer or the first payment if you are making a short term periodic payment offer or deferred periodic payment offer. Page twelve of the Form 656 OIC Booklet covers how many application fees and Forms 656 you are required to submit based the types of liabilities.

You may qualify for a low-income exception for the application fee and offer payment requirement. To determine if you qualify for this exception, use the OIC Application Fee and Payment Worksheet on the first page after Form 656 in the OIC Booklet. If you do qualify for the exemption complete form 656-A Income Certification for Offer In Compromise Application Fee and Payment. The 20% of offer deposit is paid using Form 656-PPV. The monthly payments made for a short-term periodic payment offer are made using this form also. Both forms can be found in the Offer in Compromise Booklet.

The basic idea of an IRS Offer in Compromise is that the IRS will accept a lower amount for your tax liability if you offer them more than they could collect from you though voluntary and involuntary collection methods. So basically if the value of all of your assets plus your income exceeds the amount of tax you owe, then the IRS will not approve your offer as they could collect the tax from you themselves. For this analysis the IRS uses a computation that has two parts, a net equity in assets component and a future income component. To Understand The Offer in Compromise computation you must first review the two payment options for an Offer, which are reviewed below.

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