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QUALIFYING FOR AN OFFER IN COMPROMISE

Law Office of David A. Semanchik Jan. 27, 2022

You have probably seen the ads on TV or heard them on the radio about settling your tax debts for pennies on the dollar. What these ads are referring to is an offer in compromise (OIC) submitted to the Internal Revenue Service (IRS). An offer in compromise may not be for pennies on the dollar, but your proposed settlement of back taxes will be less than what the IRS says you owe.

Will the IRS accept your offer in compromise? That depends on several factors, including whether you have the resources to pay in full in their eyes. Keep in mind that the success rate is usually less than 40 percent, so an offer in compromise is best attempted with the help of an attorney experienced in tax resolution matters.

If you owe the IRS more than you believe you can pay without jeopardizing your daily welfare, contact me at the Law Office of David A. Semanchik. I proudly serve clients in and around Toms River, New Jersey, and throughout the state, including Brick Township, Manasquan, Manchester, and Lacey.

What Is an Offer in Compromise?

As briefly defined above, an offer in compromise is a settlement the taxpayer proposes to the IRS to resolve back taxes still outstanding. As the IRS states on its website:

“An offer in compromise (OIC) is an agreement between a taxpayer and the Internal Revenue Service that settles a taxpayer's tax liabilities for less than the full amount owed. Taxpayers who can fully pay the liabilities through an installment agreement or other means, generally won't qualify for an OIC in most cases.”

Notice that an OIC, according to the IRS, is not for taxpayers who can fully pay their liabilities. For whom is it available, then? Generally speaking, the IRS will consider an OIC if one of two conditions exist:

  • The IRS has reason to doubt that it can ever fully collect the tax obligations due. The IRS calls this “doubt as to collectibility.”

  • You fall under exceptional circumstances, and payment of your full tax liability would cause “economic hardship” or would be “unfair” or “inequitable.”

There is one other ground for an OIC that is rarely used called “doubt as to liability.” This represents the taxpayer’s claim that the tax liability has been assessed incorrectly.

Understanding the Process

Before everything else, you should consider if you qualify under any of the grounds listed above. Then the IRS has established a formalized process for seeking an offer in compromise.

First, you must file IRS Form 656, Offer in Compromise, along with a nonrefundable application fee of $205, which is waived if your income is below the poverty level. You must also file Form 433-A if you are an individual or Form 433-B if you are applying as a business. Both forms are called a Collection Information Statement. If you believe the tax debt is not yours or does not exist, you can also file Form 656-L.

You must also include your first payment toward fulfilling your proposed offer in compromise along with your application.

Here, you have two options, a lump sum or a 24-month payment plan. If you choose a lump sum, you have five months to complete your payments, so you have to include 20 percent of your proposed settlement with your application. If you choose the payment plan, you must submit the first payment with the application. You can continue to make payments as you await the decision by the IRS.

Completing the form and submitting your fee and the first payment is just the beginning of the OIC process. The IRS will request rafts of documentation from you, including bank records, pay stubs, vehicle registrations, and more. It can be a lengthy process, so do not expect a quick answer.

If, in the long run, the IRS considers your offer too low, it will inform you of the amount it considers acceptable. You can submit a new offer within a month without filing another Form 656. After that, you will have to begin the process over again with a new Form 656.

Working With an Experienced Tax Attorney

Submitting a successful offer in compromise is not a do-it-yourself proposition. The IRS will continue to request information and documentation and ask questions that, if not properly answered, can doom your chances of success. You must submit and pursue your OIC with the help of an experienced tax attorney.

Contact me at the Law Office of David A. Semanchik, so together we can evaluate your situation and come up with the best path to pursuing an offer in compromise. I have three decades of experience in these matters, and I proudly serve clients in Toms River, Brick Township, Manasquan, Manchester, Lacey, New Jersey, and throughout the state.