People used to prepare elevator speeches, or introductions that could be completed within the span of an elevator ride. Today, people do things a little differently. Trying to get current on delinquent tax debt can be stressful and confusing, so we wanted to explain to you what an offer in compromise with IRS means in 140 characters or fewer: an offer in compromise with the IRS means you have the opportunity to pay less than your total tax liability.
What Is an Offer in Compromise with IRS?
An offer in compromise, or OIC, is an agreement between the Internal Revenue Service and a taxpayer that allows the taxpayer to settle for less than the total tax debt, late fees, penalties, and interest. Taxpayers who can afford to pay their tax liability in full through other agreements will not usually qualify for an offer in compromise with IRS.
How to Qualify for an Offer in Compromise
To qualify for an offer in compromise with IRS, you must have filed all tax returns and, if applicable, made all mandatory estimated tax payments for this tax year. Furthermore, if you are a business owner with employees, you must have made all necessary federal tax deposits for this quarter.
To determine if you qualify for an offer in compromise, the IRS first calculates your RCP, or reasonable collection potential. The RCP is the method the IRS uses to measure how much you will be able to pay. This calculation includes the realizable value of your assets, including bank accounts, real property, automobiles, and other property. Furthermore, the Internal Revenue Service considers anticipated future income based on current income and allows for basic living expenses.
Why an OIC is Offered
In some cases, the IRS will offer you an OIC. The most common circumstance under which the IRS will offer you an OIC is if there is any regarding your tax liability. This criterium is met only when there is a legitimate, articulable dispute about the existence of the tax debt or the accurate amount of the tax debt under the law.
The second case that may lead the IRS to accept an offer in compromise is if there is a doubt that the entire amount of the tax debt is collectible under law. A doubt regarding collectibility exists whenever the taxpayer’s actual income, estimated income, and assets are less than the full amount of the tax debt including delinquent and current tax debt, interest, penalties, and late fees.
The third and final case you can make to the IRS for an offer in compromise is based on effective tax administration. You may make the case that paying your tax liability in full will create an economic hardship. Or, it may be the case that a full payment will be inequitable and unfair due to exceptional circumstances. This case is made when there is no reasonable doubt that the full amount is collectible and the tax is legally owed, but it will be hard for the taxpayer to fulfill his or her entire obligations.
How to Apply for an OIC
There is no application fee for an offer in compromise if it is based on a doubt of liability. Otherwise, you must submit the application fee stated on Form 656. This fee is not to be combined with any other tax payments. The only other exception to this rule is if the taxpayer is an individual who is eligible for the low-income exception. This exception does not extend to entities, such as corporations or partnerships.
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For more information on what an offer in compromise with IRS entails, contact us today. With over 35 years of experience, our compassionate, confidential tax consultants have the qualifications and experience to help you find the best tax resolution for your needs.