The Internal Revenue Service (IRS) can be a daunting and overwhelming entity, especially when one is faced with tax debt that they cannot afford to pay. However, the IRS does offer a way out for those who are struggling to pay their tax debt. An IRS offer in compromise (OIC) is a program that allows taxpayers to settle their tax debt for less than the full amount owed. While an OIC may seem like a great solution for someone with tax debt, it is important to understand when it is appropriate to apply for an OIC.
What is an Offer in Compromise (OIC)?
An IRS Offer in Compromise is an agreement between a taxpayer and the IRS that settles the taxpayer’s tax liabilities for less than the full amount owed. The IRS considers the taxpayer’s ability to pay, income, expenses, and assets when determining eligibility for an OIC. The taxpayer must provide detailed financial information and make an offer to the IRS that represents the maximum amount they can afford to pay.
There are three different types of OIC:
1. Doubt as to collectability:
This type of OIC is for taxpayers who have a doubt that the IRS will be able to collect the full amount of the tax debt owed. This can happen when a taxpayer has limited assets and income.
2. Effective tax administration:
This type of OIC is for taxpayers who can pay their tax debt in full, but doing so would cause an economic hardship or be unfair or inequitable.
3. Doubt as to liability:
This type of OIC is for taxpayers who believe that they do not owe the full amount of the tax debt. The taxpayer must provide detailed information to support their claim.
When should someone apply for an IRS Offer in Compromise (OIC)?
1. Financial hardship
One of the most common reasons someone would apply for an OIC is because they are experiencing financial hardship and cannot pay their tax debt. If a taxpayer’s income is less than their expenses, they may be eligible for an OIC. In this case, the taxpayer would need to prove that paying the full amount of the tax debt would create a financial hardship.
To determine financial hardship, the IRS will look at the taxpayer’s current income and expenses, as well as their future earning potential. The IRS will also consider the value of the taxpayer’s assets, including real estate, investments, and personal property.
If the taxpayer is eligible for an OIC based on financial hardship, they will need to make an offer to the IRS that represents the maximum amount they can afford to pay.
2. Doubt as to collectability
If the taxpayer has a doubt that the IRS will be able to collect the full amount of the tax debt owed, they may be able to apply for an OIC. This can happen when a taxpayer has limited assets and income.
The IRS will consider the taxpayer’s ability to pay, including their income, expenses, and assets. They will also consider the taxpayer’s earning potential in the future.
If the taxpayer is eligible for an OIC based on doubt as to collectability, they will need to make an offer to the IRS that represents the maximum amount they can afford to pay.
3. Doubt as to liability
If the taxpayer believes that they do not owe the full amount of the tax debt, they can apply for an OIC based on doubt as to liability. This type of OIC is based on the taxpayer’s belief that the tax debt is not correct.
The taxpayer must provide detailed information to support their claim, including evidence that they do not owe the full amount of the tax debt. The IRS will review the evidence and make a determination.