An offer in compromise (OIC) is an agreement between the IRS and a taxpayer that settles the person’s tax debt for less than the full amount. Generally, OICs are reserved for taxpayers who are unable to pay their full tax liability any other way. If you can pay with an installment agreement, you generally won’t qualify for an OIC. OICs are frequently an option of last resort, but that doesn’t mean other options aren’t worth considering. Here’s some essential information to help you decide if an OIC may be the right decision for you.
To qualify for an OIC, you need to meet these criteria:
- You have filed your tax returns for the current year.
- You have made all required estimated tax payments for the current year.
- If you’re a business owner with employees, you have made all required federal tax deposits for the current quarter.
In addition, the IRS generally won’t allow an OIC unless the amount you offer to pay is equal to or greater than what is called the reasonable collection potential (RCP). RCP is the metric the IRS uses to assess what you can realistically pay, and incorporates factors such as assets, property value, automobiles, bank accounts, and future income.
Advantages of an OIC
Settling Your Liability
An OIC allows you to negotiate with the IRS to settle your tax liability for an amount you can reasonably pay.
Putting a Hold on Collections
Reaching an OIC agreement with the IRS puts a hold on collection activities from other creditors. One exception, however, is ongoing collection activities, including wage garnishment.
Disadvantages of an OIC
Because an OIC is intended to be a last resort for taxpayers, the disadvantages frequently outweigh the benefits. These include:
The IRS is particularly strict about OIC approval. Generally, an OIC requires you to have a low monthly income and few assets. Spending money and time trying to reach an OIC agreement can quickly turn into more trouble than it’s worth.
The IRS can only collect on taxes from you after 10 years. When you’re in the process of negotiating an OIC, this timeline freezes, so if you have a tax liability nearing the 10-year expiration mark, you shouldn’t consider an OIC.
After negotiating an OIC, you are required to remain tax compliant for the next five years to avoid additional penalties.
The IRS allows you to pay the negotiated sum of your OIC one of two ways:
Lump Sum Cash Offer
A lump sum cash offer means you promise to pay your liability in five or fewer installments within five months or fewer following offer acceptance. You also must provide a non-refundable payment that’s equal to 20 percent of your offer amount, along with an application fee.
Periodic Payment Offer
A periodic payment offer consists of a payment plan that’s covered in six or more monthly installments, with the last payment occurring within 24 months of offer acceptance. Pending acceptance, you also must continue to make installment payments according to the terms of the offer. All amounts are nonrefundable.
Need Other Options?
Whether you need help navigating OIC negotiations or you want to explore possible alternatives, the experts at GJR Consulting are here to help. We’ll work with you to understand your goals and find the right solution for your needs. Contact us today to get started.