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Americans are surely familiar with the "pennies on the dollar" advertisements on television, referring to the Offer in Compromise program. An Offer in Compromise (OIC) is an agreement between a taxpayer and the IRS, allowing a taxpayer to settle their tax debt for a small percentage of the overall amount. This amount will either be paid in a lump sum, or split into payments. Furthermore, under this agreement, the taxpayer must file all tax returns and pay all amounts due on time for 5 years after the offer is accepted, or face potential default.
Offer in Compromise Facts
The hard truth about an Offer in Compromise is just that; hard. The real picture is that most taxpayers do not qualify for this program. The IRS accepts a fraction of Offer in Compromise applications annually, and with over 10 million Americans having some type of tax debt with the IRS, that could mean quite a lot of rejections.
The IRS has a mathematical formula to determine which taxpayers qualify for the Offer in Compromise. The formula considers many factors of a taxpayer's situation, including:
- Doubt as to Collectability: The IRS has determined that it is unlikely that a taxpayer's tax debt will be satisfied before the Statute of Limitations expires.
- Doubt as to Liability: A taxpayer can provide documented proof that the assessed tax debt is incorrect or unjust.
- Effective Tax Administration: A taxpayer can prove that settling their tax debt in full, either with a lump sum or monthly payment plan, would cause them financial hardship.
In February 2012, the IRS announced updates to the Offer in Compromise program in order for more taxpayers to be eligible, including:
- Taxpayers with an annual income of $100,000 or less can apply.
- Tax debt amounts of $50,000 or less are eligible.
- Only 1 to 2 years of a taxpayer's future income will be considered.
To submit an Offer in Compromise a taxpayer should use Form 656, and include 20 percent of their settlement offer with the application. This nonrefundable payment will be put towards the tax debt if the application is denied. Call today for a free tax debt consultation before you apply for an OIC to ensure you qualify!