How to File an IRS Offer in Compromise (OIC)
An offer in compromise (OIC) is a last resort that the IRS will use to collect on a tax debt from a delinquent taxpayer. An OIC is a negotiated agreement between the taxpayer and the IRS to settle the debt for less than what is owed. The IRS will not pursue this option unless it is confident that it could not collect the whole amount. The IRS will not just consider the taxpayer's current financial situation, but his future earning potential as well. Given the time necessary to file an OIC and the associated fees, carefully consider whether this option is feasible.
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Instructions
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Determine if your circumstances merit an OIC. There are three situations in which the IRS will accept an OIC. First is when the taxpayer has severe financial difficulties outside of the IRS debt. The second is when there is a doubt to the accuracy of the tax liability due to an error by the IRS in the application or because of new information coming to light. Finally, if there are extenuating circumstances that makes paying the liability unfair or inequitable to the taxpayer, the IRS may accept an OIC.
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Ensure that you can meet the OIC filing requirements. To apply for an OIC, you cannot be in the midst of a bankruptcy proceeding.
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Complete the Offer in Compromise Application. Submit a completed Form 656 and provide copies of all documentary support requested by the form. Check the instructions for Form 656 to determine where you should mail the completed application.
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Mail the Completed OIC Application with application fee and appropriate payment. Submit a $150 application fee, as of this publication. In addition, submit a payment or payment plan for the tax liability to demonstrate good faith. You will either need to submit a lump sum offer at least 20 percent of tax your liability or the first installment of a periodic payment offer based on your financial status. If you are financially unable to make any of these payments, you must apply for indigent status. To qualify, you will need to complete the worksheet titled "IRS Monthly Low Income Guidelines Worksheet" in the OIC booklet, or Form 656-B. If you qualify, submit a signed Form 656-A, or an Income Certification for OIC Application Fee and Payment, instead of paying any fees.
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Tips & Warnings
Ensure that you are current with all tax filing and payment requirements for all tax years. Even if you are having a hard time paying for other years, an OIC can only be processed if you continue to meet your tax responsibilities in good faith. (Reference 3).
You may want to consider and pursue other IRS payment options, such as an Installment Plan, as the IRS will not consider an individual for an OIC unless it is confident that it cannot recover any portion of the debt through any other means.
If you have further questions about owed taxes, consult with a certified public accountant (CPA) or licensed attorney, as they can best address your individual needs. If you have financial concerns that might make hiring a CPA or attorney difficult, there are alternative options, such as Low Income Taxpayer Clinics (LITCs) or the Taxpayer Advocate Service (TAS), an independent organization operating through the IRS that provides aid to taxpayers under duress. Contact the IRS to find an LITC or TAS representative near you.
Every effort has been made to ensure this article's accuracy but it is not intended to be legal advice.
