If you owe money to the IRS or a state agency and are unable to pay the full amount, the IRS or state agency may forgive a portion of the debt and accept a lesser payment. This type of settlement agreement is commonly referred to as an offer in compromise (OIC).
Three reasons that may generally lead to an accepted OIC:
- Doubt as to liability – when a taxpayer has a genuine dispute as to the existence or amount of a tax debt
- Doubt as to collectability – when a taxpayer’s income and assets are unable to satisfy the tax debt
- Effective tax administration – when a taxpayer is facing exceptional circumstances that would make paying the tax debt unfair, inequitable, or lead to an economic hardship
In short, if you are struggling to pay what you owe to the IRS, there are policies and procedures in place that could greatly benefit you. A knowledgeable tax attorney can help you understand if you qualify for this type of tax relief.
The OIC Approval Process
The IRS or a state agency approves an OIC request on a case-by-case basis. To reach their decision, they will consider a variety of factors regarding your financial situation, including your ability to pay, income, assets, and monthly expenses.
In addition, taxpayers must generally complete the following steps:
- You must have filed all of your outstanding tax returns
- You must have made your required estimated tax payment for the current tax year
The OIC application process can take an extended period of time. The IRS, for example, generally takes more than 12 months to provide a decision. Once an application has been submitted, however, all attempts to collect outstanding tax balances will generally cease. If the IRS does not provide a response within 24 months, the application will be considered approved by default.
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