It seems like countless television ads claim you can settle your IRS back taxes for pennies on the dollar. While you assume that this arrangement is almost too good to be true, the IRS offers taxpayers the option to pay a reduced amount and settle their outstanding tax debts. This program is called an Offer in Compromise (OIC), and it has stringent requirements for qualification. If you can qualify for an OIC, you stand to eliminate your tax debt for much less than you owe, but you won’t be guaranteed approval. Discover three things you should understand about an OIC.
How Does an Offer in Compromise Work?
Image via Flickr by CreditDebitPro
When you apply for an OIC, you inform the IRS that you can’t afford to pay your tax debt as it currently stands. You can pay something, but not the amount you owe. You also have to demonstrate to the IRS that your income is only enough to cover your bills with no hope or opportunity of an increase in income within the next six to 12 months. Your OIC won’t be accepted if you make more than enough money to make payments on an installment agreement.
The Grounds for Making an Offer in Compromise
The IRS has specific criteria for determining whether someone is eligible for an OIC and whether the individual’s reasoning fits within the criteria the IRS uses for determining eligibility. The IRS has three terms for accepting an OIC:
- A doubt as to liability. If a dispute exists between the IRS and the taxpayer regarding who owes the debt or the amount the taxpayer owes, the taxpayer can invoke an OIC to pay the amount the individual believes is owed and not what the IRS requires.
- A doubt as to collectibility. This item comes into play in the event the taxpayer has assets and income that are less than the total amount of taxes owed.
- Effective tax administration. The IRS and the taxpayer agree that the amount owed is correct and the full amount is available for payment from the taxpayer. The provision is that doing so would create an economic hardship to the taxpayer.
Applying Is Not a Guarantee of Acceptance
Getting an OIC approved is not easy even if you follow the steps in an OIC application and pay the fee. The IRS has to review your application, investigate the status of previous tax returns, and determine whether your income or estimated taxes are current as of the year you apply. These actions occur even after you’ve demonstrated to the IRS that you are either incapable of paying the amount owed or that you feel that the IRS is requesting more money than you feel is owed. The OIC program uses strict eligibility standards to prevent people from misrepresenting themselves.
The OIC program is designed to be used by people who have no other alternatives for payment. If you feel you can qualify for an OIC, you can apply to resolve tax debts and communicate the specifics of your financial situation to the IRS. Additionally, if you find yourself struggling with tax debt, contact a tax professional for some assistance.