In its October 18, 2022, Tax Tip (Tax Tip 2022-159), the IRS encourages individuals and businesses with outstanding federal tax debt to consider an Offer in Compromise (“OIC”). Through an OIC, a taxpayer may apply to enter an agreement with the IRS to settle a tax debt for less than the full amount owed. The goal of the OIC program is to produce a compromise that serves the best interests of both the taxpayer and the IRS, when the taxpayer is either unable to pay their full tax debt or when doing so would cause a financial hardship.
Before submitting an OIC application, a taxpayer must first complete the following four steps: 1) file all tax returns they are legally required to file, 2) ensure that they have received a bill for at least one tax debt included on the offer, 3) make all required estimated tax payments for the current year, and 4) if the taxpayer is a business owner with employees, make all required federal withholding tax deposits for the current quarter and the two preceding quarters.
Taxpayers may propose one of the following two payment options when applying for an OIC:
- Lump Sum Cash: The taxpayer pays 20% of the total offer amount upon submission of the offer, with the remaining balance to be paid over five or fewer increments within five months of the date of the offer’s acceptance.
- Periodic Payment: The taxpayer makes the first payment upon submission of the offer and pays the remaining balance in monthly increments within six to 24 months in accordance with the taxpayer’s proposed offer terms.
For an OIC application package to be considered complete, a taxpayer must submit the items listed below. (Note that taxpayers who meet the criteria specified in the IRS’s Low-Income Certification Guidelines are not required to pay the $205 application fee or to make the initial offer payment. See the IRS’s Offer in Compromise – Frequently Asked Questions page for instructions on determining whether a taxpayer qualifies for the Low-Income Certification.)
- $205 application fee (unless the taxpayer meets the Low-Income Certification)
- Initial offer payment (unless the taxpayer meets the Low-Income Certification)
- Completed Form 656, Offer in Compromise
- Completed and signed Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals, if the taxpayer is an individual wage earner, operates or operated as a sole proprietor, or is authorized to submit an offer on behalf of the estate of a deceased individual.
- Completed and signed Form 433-B (OIC), Collection Information Statement for Businesses, if the taxpayer is a Corporation, Partnership, or LLC.
After submitting an OIC, a taxpayer must continue to timely file and pay all required tax returns, estimated tax payments, and federal tax payments for themself and any business in which they have an interest. In its review of an OIC application, the IRS considers a taxpayer’s income, expenses, and asset equity, as well as their unique set of facts and any special circumstances. For additional information on the OIC program and how to submit an OIC, see the IRS’s Offer in Compromise Booklet. Taxpayers may also use the IRS’s Offer in Compromise Pre-Qualifier tool to see whether they may be eligible for an OIC and to help determine a starting point for an offer amount.
View the full Tax Tip 2022-159 here.