Recent figures showed that U.S. residents owed around $414 billion in overdue taxes plus interest for 2021. Most Texas residents don’t want to owe money to the IRS. However, the IRS offers U.S. citizens a way to pay tax debt through an offer in compromise.
Overview of an offer in compromise (OIC)
The offer in compromise allows consumers to settle tax debt with the IRS commonly for a lot less than they owe. To begin, the consumer must fill out Form 656, which requires them to pay a nonrefundable fee.
The taxpayer has the option of making a lump-sum payment or a periodic payment, each requiring an application fee payment. If they choose a lump sum, it requires a 20% payment upon filing and must be paid within five months. A periodic payment requires a payment within 24 months, and taxpayers must file the initial payment with the form.
Qualifying for an OIC
The IRS rejected 67% of OICs in 2019, but it is still possible to get accepted by meeting the criteria. One criterion includes reasonable collection potential (RCP) based on how much the IRS thinks it can collect from the consumer.
If the taxpayer’s RCP exceeds or equals the amount owed, the offer is likely to get rejected. The IRS also often rejects an OIC if:
- The consumer is in bankruptcy.
- They haven’t paid the estimated taxes.
- The consumer hasn’t filed recent tax returns.
- They have committed a crime.
The IRS may accept an offer if they “doubt as to collectibility” after evaluating the taxpayer’s assets and income. They also may accept an offer if they “doubt as to liability,” meaning that the taxpayer doesn’t owe the determined amount. While liability is commonly challenging to pursue, the taxpayer can submit Form 656-L if they think the amount is wrong.
The OIC rejection letter should include the reason, and if you have been rejected, you have 30 days to appeal the decision. If a taxpayer is having difficulty understanding their tax situation or they keep getting their OICs rejected, legal assistance or a tax advocate may be able to help answer their questions.