An Offer In Compromise (OIC) is an agreement between the IRS and the taxpayer to agree on a lower amount. The IRS uses the RCP (reasonable collection potential) to determine what the new amount owed will be.
To arrive at the RCP, the IRS may use personal financial information like bank account and income information, car and other asset information, and properties.
Within the IRS offer in compromise, there are a couple of different payment options.
Lump Sum Cash Offer: A lump sum cash offer is when the taxpayer pays taxes owed within 5 months of an OIC being accepted.
Periodic Payment Offer: A periodic payment offer is when the taxpayer pays taxes owed in 6 or more monthly payments, within 12 months of the OIC being accepted. Keep in mind that if you miss a payment or fail to hold up your end of the agreement, the IRS can reopen your case and you can, once again, be responsible for the total amount owed.
When you receive a letter from the IRS informing you of taxes owed, it can be discouraging. Though it may be tempting to ignore those letters for as long as you can, the most important thing you can do is communicate.
It’s a program that provides different payment options for those who owe and can’t afford to pay. In order to take advantage of the program, taxes must be filed and up to date, without years of outstanding late fees and penalties. But life happens, and bills can be overwhelming. So if you do have outstanding late fees and a bill that you can’t pay, let us know.
For taxpayers who have demonstrated that they are unable to pay their tax bill in full, the IRS offers a Fresh Start Offer in Compromise. This will need the assistance of a professional tax preparation service, as negotiating with the IRS to pay less than the full amount owed can be tricky. Essentially, the taxpayer will show that paying the full amount of taxes owed will create an insurmountable financial hardship. In these cases, the IRS may forgive a portion of the amount owed. Usually, you’ll have to agree to direct withdrawal of installment payments from a bank account.
Notably, it’s important to note that compromise arrangements with the IRS are rare, and generally require the assistance of a tax professional to achieve. If you are approved, make sure that you make each payment on time and in full; otherwise, the IRS can nullify your compromise and you’ll be on the hook for the full amount owed.