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What is an Offer in Compromise? LifeBack Tax
Taxpayers who owe back taxes to the Internal Revenue Service and are unable to pay in full may be able to reduce their liability by applying for an Offer in Compromise (OIC). An Offer in Compromise is an proposed agreement that allows a taxpayer to settle their tax debt by paying less than their owed balance. Some states, including California and New York, may also allow taxpayers to enter an offer in compromise for state back taxes.
Taxpayers may apply for an Offer in Compromise for one of two reasons: Doubt as to Collectibility, or Doubt as to Liability. Most Offers in Compromise are based on Doubt as to Collectibility, indicating that the taxpayer is either unable to fully pay their tax debt or would face financial hardship if they did so. On the other hand, a Doubt as to Liability offer indicates that the taxpayer is disputing the amount of tax debt they owe.
When making an Offer for Compromise, a taxpayer offers to pay the government a portion of their tax debt, indicates their timeframe for paying this offered amount, and includes financial statements as proof of their inability to pay the full amount. Under a short-term offer, a taxpayer includes an initial payment of 20% of their total offered amount with their offer, and agrees to pay the rest in 5 or fewer payments within the next 5 months. In a long-term offer, the taxpayer agrees to make monthly payments over the next 6 to 24 months, and includes the first monthly payment with their offer as an initial payment. In addition to their initial payment, the taxpayer is also charged a $186 application fee. Both the fee and initial payment may be waived if the taxpayer qualifies as a low-income taxpayer, as defined by the IRS.
To be eligible for an Offer in Compromise, a taxpayer must be current on filing their tax returns. If the taxpayer is in an existing installment agreement, they must also be current on their payments. The IRS considers an Offer in Compromise based on the taxpayer's enclosed financial information. If the IRS determines that the taxpayer can pay more than the amount offered, they may propose a revised amount or reject the taxpayer's offer. While reviewing an Offer in Compromise, the IRS halts accumulation of late penalties and interest on the taxpayer's debt, and the taxpayer is not required to make payments toward existing installment agreements. If the IRS rejects an offer, the taxpayer has 30 days to pay their tax debt before penalties and interest begin accruing again.
Once the IRS accepts an Offer in Compromise, the taxpayer is obligated to pay their offer amount as per their proposed timeframe. The IRS suspends collection actions such as sending collection notices, administrative levies, bank levies, or wage garnishments. Any later tax refunds are applied toward the taxpayer's liability. If the IRS has filed a federal tax lien on the taxpayer's assets, this lien is released once the offer amount is paid. However, even after paying the offer amount, the taxpayer is obligated to file and pay their taxes on time for the next five years to prevent their offer from going into default.
If you are in dire straits due to past due taxes and are unable to pay, we at LifeBack Tax can help you to settle your tax debts through an Offer in Compromise. We are well-experienced in representing the common taxpayer to federal and state tax agencies, and will negotiate with the government on your behalf to find the right settlement for you.
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