Offer in Compromise Program
The IRS Offer in Compromise Program (also known as OIC) was established by IRS to allow qualifying individuals with unpaid income tax liabilities to negotiate a settlement with IRS in which an agreed-upon lesser amount is paid that will be accepted to full-pay the total amount due.
You might owe IRS $50,000 and only be able to pay them $8,614 to settle your entire debt. But your neighbor across the street might also owe IRS an equal amount of $50,000 and be able to pay them $48,297 to settle her entire debt. And both of your cases would depend on your own personal unique sets of facts and circumstances pertaining to your own cases. And those facts and circumstances would always involve:
Your ability to pay. Your income. Your expenses. Your equity in assets.
Most of the time, the IRS will not accept an Offer in Compromise unless the amount that is being offered is at least as much as what is called your “ability to pay.” Ability to pay is what IRS describes as your Reasonable Collection Potential, or RCP. Your RCP is pretty much everything you have that is worth anything. Things like cash, retirement accounts, equity in homes, even your future earnings.
In general, the IRS will accept an offer in compromise when the dollar figure offered represents the absolute most that they can expect to collect within what they consider to be a “reasonable period of time,” which is generally accepted to be seven years.
That’s why an OIC may not be right for everybody. If you are able to pay off your old taxes through an installment agreement or some other method of payment, IRS will not consider an Offer in Compromise with you.
Requirements for an Offer in Compromise
IRS has several specific requirements that must be met before individual taxpayers’ Offer in Compromise cases can be considered and assigned to Offer Examiners. Read more about the three specific types of requirements here.
Forms You Need
Everything you need is contained in this all-inclusive Form 656-B Package. It contains:
1. Form 656 Offer in Compromise.
2. Form 433-A Collection Information Statement for Wage Earners and Self-Employed Individuals.
3. Form 433-B Collection Information Statement for Businesses.
Additional Documentation Needed
Along with the proper IRS forms needed for your Offer in Compromise, IRS requires proper documentation. Documentation should include the following:
1. A current Profit and Loss Statement covering at least the most recent 6–12 month period, if appropriate.
2. Copies of the three most recent statements for each bank, investment, and retirement accounts.
3. If an asset is used as collateral on a loan, include copies of the most recent statement from lender(s) on loans, monthly payments, loan payoffs, and balances.
4. Copies of the most recent statement of outstanding notes receivable.
5. Copies of the most recent statements from lenders on loans, mortgages (including second mortgages), monthly payments, loan payoffs, and balances.
6. Copies of relevant supporting documentation of the special circumstances described in the “Explanation of Circumstances” on Form 656, if applicable.