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IRS Offer in Compromise Explained (2023)

Dealing with tax debt can be daunting, especially when you have limited finances. For taxpayers needing relief, the Internal Revenue Service (IRS) offers a program called the Offer in Compromise (OIC). This program allows eligible individuals to settle their tax debt for less than the total amount they owe. It is useful to explore the ins and outs of the IRS Offer in Compromise. These include how it works, the qualifications, and the application process. That way, you can determine if this program is right for you in 2023.

Understanding the Offer in Compromise

An offer in compromise is a debt settlement agreement between a taxpayer and the IRS. It allows the taxpayer to resolve their outstanding tax liability by paying a reduced amount based on their financial situation. The primary goal of the OIC is to help taxpayers who cannot pay their tax debt in full without causing financial hardship. This can be a lifesaver for those struggling with their finances. It helps them clear their tax debts and get back on track.

Eligibility for an Offer in Compromise

Not everyone qualifies for an OIC. The IRS evaluates each taxpayer’s situation on a case-by-case basis. It considers factors such as income, assets, expenses, and their overall financial state. To be eligible for an OIC, you must meet the following criteria:

  1. Inability to Pay the Full Tax Amount: You must demonstrate that you cannot pay your tax debt in full through a lump sum or an installment agreement.
  2. Compliance With Tax Filing and Payment Requirements: You must be current with all your tax filings and payment requirements. This means you have filed all required tax returns and are not in an open bankruptcy proceeding.
  3. Reasonable Collection Potential (RCP): The IRS will calculate your RCP. This is the amount they believe they can reasonably collect from you over time. Your RCP is based on your assets, such as real estate, cars, bank accounts, and future income. If the IRS determines that your RCP is equal to or greater than your tax debt, you will not be eligible for an OIC.
  4. Doubt as to Liability or Collectability: You must demonstrate that there is doubt as to the accuracy of the tax liability. You must also prove that the full amount cannot be collected.

Applying for an Offer in Compromise

If you believe you meet the eligibility requirements, you can apply for an OIC by following these steps:

  • Complete Form 656: This form, titled “Offer in Compromise,” allows you to propose a settlement amount. On it, you must provide information about your financial situation. Be honest and thorough in your responses, as the IRS will use this information to determine your eligibility.
  • Complete Form 433-A (OIC) or Form 433-B (OIC): Individuals should complete Form 433-A (OIC), while businesses should complete Form 433-B (OIC). These forms require detailed financial information, including income, assets, and expenses.
  • Pay the Application Fee and Initial Payment: As of 2023, the non-refundable application fee for an OIC is $205. You will also need to submit an initial payment with your application. This amount varies depending on your payment option (lump sum or periodic payment).
  • Submit Your Application: Mail your completed forms, application fee, and initial payment to the appropriate IRS office. The IRS will review your application and determine if you qualify for an OIC.

Keep in mind that the process can be time-consuming and complex. In some cases, it can help to consult with a legal tax professional who is well-versed in OICs. They can ensure that your application is complete and accurate.

FAQs About IRS Offer in Compromise

What Changes Is the IRS Making for 2023?

For 2023, the IRS continues to update and revise tax regulations in response to changing economic conditions and new legislation. These changes may include adjustments to tax brackets, standard deductions, and various tax credits. Stay informed about any modifications to ensure accurate tax filing. This also allows you to take advantage of any benefits you may be eligible for. Keep an eye on the IRS website or consult with a tax professional. They can help you stay up to date on the latest information and changes that may impact your tax situation.

How Much Does the IRS Usually Settle for With an Offer in Compromise?

The amount the IRS settles for in an offer in compromise varies on a case-by-case basis. This will depend on the taxpayer’s unique financial situation. Factors such as income, assets, expenses, and their overall financial position are examined to determine the reasonable collection potential (RCP). The IRS aims to collect an amount equal to or greater than the RCP. Therefore, the settlement amount typically reflects what they believe they can reasonably collect from the taxpayer. A set percentage or specific formula is not used, as each case is evaluated individually.

What Is the Downside of an Offer in Compromise From the IRS?

While an offer in compromise can provide tax relief for eligible individuals, there are some downsides to consider.

  • The application process can be lengthy and complicated, with no guarantee of acceptance.
  • The IRS will closely scrutinize your financial information, which may feel invasive.
  • You must comply with tax filing and payment requirements for five years after your OIC is accepted. Failure to do so can result in the reinstatement of your original tax debt.
  • A successful OIC may result in tax consequences, as the forgiven debt may be considered taxable income.

What Is the Average Cost of an Offer in Compromise?

The cost of an offer in compromise can vary depending on your case’s complexity and whether you seek professional assistance. The IRS requires a non-refundable application fee of $205 (as of 2023). It also requires an initial payment that depends on your option (lump sum or periodic payment). If you decide to hire a tax professional to help with your application, their fees can range widely. They often start at a few hundred dollars and potentially reach several thousand dollars. It is crucial to weigh the potential benefits of an OIC against the costs before proceeding with the application process.

Contact Tax Smith Today

If you are questioning the merits of an offer in compromise for your case, the experienced team of tax professionals at Tax Smith can help. Our knowledgeable advisors can review your financial situation and provide detailed guidance. We can ensure that you are taking advantage of all the available options. Contact us today for a legal consultation. We look forward to helping you resolve your tax debt quickly and efficiently.

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