For some taxpayers, an Offer in Compromise (OIC) can be a strategic and smart option for settling back tax debt with the IRS. But it’s not as easy as it sounds. There are a few factors that make it just a bit more complicated than making any simple offer.
The Offer in Compromise, or an OIC, is an IRS program for taxpayers to settle back tax debt. It allows a taxpayer to negotiate, with the goal of paying an amount less than the larger, original balance. They can take anywhere from a few months to two years to finish, and are more suited for those who owe more than $25,000.
Businesses that fall behind on paying payroll taxes can qualify for an OIC, but both businesses and individuals better both be ready to fork over a good amount of documentation to the IRS.
But it’s not just documentation that should be considered by those pursuing an OIC. Here are some factors of the OIC you should know about:
In order for your OIC to be finalized, you’ll need to stay tax compliant for five years after it’s been accepted. Owing an extra dollar in back taxes during those five years will mean you’ve breached the OIC. This means the IRS will have the right to revoke it, and your entire tax liability will become due.
Settling your back tax debt with an OIC suspends the statute of limitations for IRS collection actions. The IRS normally only has 10 years to pursue back taxes, but the ten-year limit gets suspended by an Offer in Compromise. So, if your back tax debt is four years outstanding, the one or two years when the IRS considers your OIC won’t count toward the 10 years, letting the IRS keep the extra six years to collect against you. This is true even if the IRS rejects your OIC.
The IRS’s acceptance of your OIC means you’ll lose the opportunity to challenge your tax liability in court. This disadvantage may not be so bad, but it’s a factor that should be fixed into your tax equation.
To increase your chances of the IRS accepting your OIC, a cash offer to pay the negotiated tax liability within three months will more than likely get their attention. Some OICs are made with monthly payments, but a cash payment with 90 days gives the IRS less reason to believe that you’ll default.
An Offer In Compromise may seem easy and straight forward, but weigh out your options before you go down that road with the IRS.
Are you considering an Offer in Compromise? Comment below or tweet us at @StopIRSDebt!
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