What Is an Offer in Compromise and Could You Qualify for One?

What Is an Offer in Compromise and Could You Qualify for One?

• Sep 01, 2021

If you have a large tax bill that seems impossible to pay, you’re likely searching for any possible way to settle that tax debt. Did you know that the IRS offers an option that allows you to settle your taxes for less than what you owe? This settlement option is called an offer in compromise, or OIC. What exactly is an OIC, and who can qualify for one? Keep reading to find out.

What Is an OIC?

An offer in compromise is a settlement agreement between the IRS and the taxpayer. The taxpayer completes an application packet and submits an offer for a settlement amount that they believe they can pay towards their taxes. An IRS employee will then review the offer and thoroughly investigate the taxpayer’s financial circumstances. If the offer amount is the most they believe they can expect to collect on your tax debt, your OIC may be approved, and you’ll be able to settle that debt for less than what you owe.

However, not just anyone can apply for an OIC, and having your offer accepted can be difficult. Here’s what you need to know about qualifying for an OIC.

Who Is Likely to Receive an OIC?

Offers in compromise are generally reserved for those with little to no income, very few assets, and no prospects of an income increase in the future. If you would like to get an idea of whether or not you would qualify for an OIC, you can complete the Offer in Compromise Pre-Qualifier Tool from the IRS website. This tool will help you determine if your income is low enough to potentially qualify you for an OIC.

You will typically qualify for the low income certification if your adjusted gross income (AGI) is less than or equal to the amount shown on the chart on Form 656, Section 1, per your family’s size and location. If you don’t meet the low income certification based on your AGI, you may also request a waiver based on your household’s gross monthly income on Form 433, multiplied by twelve.

Of course, meeting those qualifications is just the first step in actually receiving an OIC.

Applying and Making an Offer

Receiving an OIC requires you to fill out a lengthy packet and provide detailed documentation regarding your income and assets. Additionally, you’ll have to put together a settlement offer to submit to the IRS that is the maximum amount you can reasonably pay on your tax debt. It is imperative that your packet be completed properly and that you include all necessary documentation; OIC applications are frequently rejected for simple errors that could have been prevented.

We strongly recommend that you work with a tax advocate to help you complete your OIC application packet. This will help ensure that everything is filled out correctly so your offer isn’t rejected for something simple. Additionally, we can help you calculate a reasonable offer that is more likely to be accepted by the IRS.

What If My Offer Is Rejected?

Once your packet and offer are submitted, the IRS will review it. If they find that you qualify for an OIC, but don’t believe your offer is sufficient, they’ll provide you with a new settlement offer and give you the chance to amend your own offer to match. If you don’t, your OIC will be rejected.

If your OIC application is rejected, it is possible to appeal the decision. To do this, you will typically need to provide additional documentation to show that you genuinely cannot afford the amount that IRS is asking you to pay. This can also be done if the IRS provides a counter-offer amount that you believe is too high.

The appeal process can be difficult so, again, it’s a good idea to have an advocate on your side.

Getting Help with an OIC

Exactly how do you have someone work on your behalf with the IRS? You’ll need to authorize a third party in two different ways if you want an advocate for your OIC. First, you’ll need to complete Form 8821 to authorize a third party to receive your confidential tax information from the IRS. Additionally, you’ll need to complete Form 2848, Power of Attorney and Declaration of Representative, in order for that person or persons to actively represent you before the IRS.

If you need an advocate to apply for an offer in compromise or another form IRS tax settlement, contact the IRS Advocates today.