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Offers in compromise: What do you need to know?

If you fall behind on your taxes, or if your tax bill is greater than what you can afford, the worst thing you can do is ignore the situation. Though the IRS has an intimidating reputation, it can be understanding, which is evident by the fact that it offers a few alternative payment methods for people who cannot afford their tax bills.

One alternative payment method is an offer in compromise. An OIC is an agreement between you and the IRS that allows you to settle your tax bill for less than what you owe. IRS.gov explains the ins and outs of offers in compromise, including when it may accept an offer and how you may pay if the agency does accept.

When the IRS may accept an OIC

An OIC is not available to taxpayers who can pay the full amount of their tax bill via an installment agreement or other means. Moreover, an OIC applicant must make an offer that is equal to or greater than his or her “reasonable collection potential,” which is an amount that the IRS can realize from his or her total assets, including bank accounts, real property, vehicles and other valuables. The RCP also considers future income less the cost of basic living expenses. If you meet these criteria, and if you are otherwise up-to-date on your taxes, the IRS may accept your offer if one of the following is true:

  • There exists doubt as to your liability, either in regards to its existence or the alleged amount.
  • The IRS doubts that it can reasonably collect the full amount you owe.
  • The IRS calls upon the notion of “effective tax administration,” which states that though it does not doubt that you owe the debt, and though it does not doubt you can repay it, it believes that requiring full payment would either cause you economic hardship or be unfair given exceptional circumstances.

If you meet the qualifying criteria, there are two ways in which you may pay an OIC.

Payment options for an OIC

If the IRS grants you an OIC, you may repay your debt via two means. The first is via a lump sum payment. A lump-sum payment is one you can pay in five or fewer installments. If you require between six and 24 months to repay your tax debt, the IRS may grant you a “periodic payment offer.” Regardless of which plan you accept, you must pay a 20% non-refundable application fee, which is in addition to the total amount you owe.

Offers in compromise can prove hugely beneficial if you have substantial outstanding tax debt. Before you accept an offer, however, you may wish to explore additional relief options.