The IRS Offer in Compromise program provides taxpayers an opportunity to settle their tax debt for less than the entire amount they owe. Faris Khatib from Ideal Tax says this can be a lifeline for those struggling with overwhelming tax liabilities. However, not everyone is eligible for this program. It’s crucial to determine if you qualify before applying.
In this article, we’ll examine the eligibility requirements and factors that the IRS considers when evaluating an Offer in Compromise application. By understanding these criteria, you can better assess your chances of qualifying and potentially resolving your tax debt once and for all.
What Is Offer In Compromise?
The Offer In Compromise (OIC) program from the Internal Revenue Service (IRS) offers taxpayers a unique opportunity to settle their tax debt for less than they owe. Typically, it’s only available when taxpayers can demonstrate that paying the full amount would cause financial hardship or if there is a reasonable doubt as to the liability or collectability of the full amount.
Those applying for an OIC must be current on taxes and filing requirements, provide the IRS with all necessary information, and be able to prove their failure to pay was due to certain circumstances, such as unreasonable economic hardship or making a payment would leave them unable to afford basic living expenses. Additionally, recipients must agree to stay within a repayment plan and pay all future tax liabilities when submitting an OIC proposal.
Eligibility Requirements For An Offer In Compromise
To be eligible for an Offer in Compromise (OIC), a taxpayer must meet one of three criteria set forth by the Internal Revenue Service (IRS). These include:
1. Doubt As To Liability:
This means that there is a legitimate dispute about whether the amount of taxes owed is accurate. For example, if the IRS has made an error in calculating the amount owed or if the taxpayer can prove they were not responsible for the tax debt, they may qualify for this criterion.
2. Doubt As To Collectibility:
If a taxpayer doesn’t have adequate funds or income to cover their tax debt, and there is no expectation that this will be achievable soon, they may qualify for undue financial hardship. To demonstrate this, the person must prove paying off the whole liability would cause too much distress to their finances.
3. Effective Tax Administration:
When responsibility and payability are definite, but it would be economically unjust or inequitable to demand full payment, this rule applies. For example, if a taxpayer has a serious medical condition that requires ongoing treatment and paying their tax debt would prevent them from receiving necessary care, they may qualify under this criterion.
It’s important to note that meeting one of these eligibility requirements does not guarantee acceptance into the OIC program. The IRS will also consider other factors such as the taxpayer’s income, expenses, and assets when evaluating an application.
Factors That The IRS Considers When Evaluating An Offer In Compromise
When evaluating an Offer in Compromise (OIC) application, the Internal Revenue Service (IRS) considers a variety of factors to determine whether or not to accept the offer. The following are some of the most important factors:
1. Ability to Pay: The IRS will evaluate the taxpayer’s ability to pay their tax liability based on their current financial situation. This includes looking at their income, expenses, and asset equity.
2. Income and Expenses: The IRS will review the taxpayer’s income and expenses to determine their monthly disposable income. This is calculated by subtracting necessary living expenses from gross monthly income. A higher disposable income will decrease the likelihood of acceptance into the OIC program.
3. Asset Equity: The IRS will also consider the value of assets owned by the taxpayer, such as real estate or investments, and how much equity they have in those assets. If a taxpayer has significant equity in assets, it may reduce their chances of being accepted into the OIC program.
4. Future Income Potential: Finally, the IRS will consider a taxpayer’s future earning potential when evaluating an OIC application. This includes factors such as education level, work experience, and earning history.
To evaluate these factors, the IRS typically requires taxpayers to provide detailed financial information such as bank statements, pay stubs, tax returns, and other supporting documentation. The IRS uses this information to calculate a reasonable collection potential (RCP), which is used to determine whether or not an offer is accepted.
It’s important for taxpayers considering an OIC to be honest and forthcoming with their financial information during this process as any discrepancies can result in the rejection of their application.
How To Apply For An Offer In Compromise?
If you’re unable to settle your IRS tax debt in full, an Offer in Compromise (OIC) could be the perfect solution for you. Here is a step-by-step guide on how to apply for an OIC:
1. Determine if You Qualify: Before applying for an OIC, make sure you meet the eligibility requirements set forth by the IRS, including doubt as to liability, doubt as to collectibility, and effective tax administration.
2. Complete Form 656: The first step in applying for an OIC is completing Form 656, which is the Offer in Compromise application. This form requires detailed financial information about your income, expenses, assets, liabilities, and tax debt.
3. Submit Supporting Documentation: In addition to Form 656, you’ll need to submit supporting documentation such as bank statements, pay stubs, tax returns, and other financial records that demonstrate your ability to pay.
4. Pay the Application Fee: There is a non-refundable $205 application fee for submitting an OIC application. However, this fee may be waived for taxpayers who meet certain low-income guidelines.
5. Wait for Review: After submitting your application and supporting documentation, the IRS will review your offer and determine whether or not it’s acceptable based on their evaluation of your ability to pay.
Tips On Submitting A Successful Offer:
1. Be Honest: It’s important to be honest and forthcoming with all of your financial information when applying for an OIC. Any discrepancies or omissions can result in the rejection of your offer.
2. Provide Detailed Information: The more detailed information you provide about your financial situation, the better chance you have of being accepted into the OIC program.
3. Consider Hiring a Professional: While it’s possible to complete an OIC application on your own, many taxpayers choose to hire a tax professional who has experience with these types of applications.
Applying for an Offer in Compromise can be a complex process but following these steps and providing all necessary documentation will increase your chances of success.
Conclusion:
Knowing if you may qualify for an IRS Offer in Compromise (OIC) is a great first step to getting your tax debt and future plans on the right track. OICs can offer significant forgiveness of payment and provide you with a fresh financial start. Remember, to qualify for an OIC, there must be doubt as to your ability to pay or collectibility. It can also be necessary to show that the payment of tax liability discussed in the offer is in full satisfaction of the debt owed.
Always consult a professional when considering such strategies and discuss in detail how you might benefit from this type of agreement. Taking control over your IRS debt can make all the difference when it comes to budgeting, taxes, and overall financial wellness – so take a step forward today by learning more about how an OIC could help you achieve your goals!
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