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If you owe the IRS back taxes, you might feel backed up against a wall when trying to find relief options. One of the best tax relief programs to consider and explore with your tax professional is an offer in compromise (OIC). An OIC provides an agreement between the taxpayer and the Internal Revenue Service that settles a taxpayer’s liabilities for less than the full amount owed.

When receiving OIC requests, the IRS examines several factors, including your ability to pay, your income, your expenses, and your asset equity. If a taxpayer has the ability to pay the full tax liability through an installment agreement or other payment service, they will not qualify for an OIC in most cases. The IRS currently accepts requests for an OIC based on three grounds. A taxpayer must have:

• Doubt as to liability, which is when there is a genuine dispute against the existence or correct amount a taxpayer actually owes;
• Doubt as to collectibility, which means that a taxpayer’s assets and income are less than the full amount of the tax liability;
• Effective tax administration, when there is no doubt to liability or collectibility, but requiring full payment would create an unfair economic hardship because of exceptional circumstances.

You might be wondering how to get the offer in compromise accepted. Some of the top reasons OICs are rejected include additional tax debt accrual, missing information on OIC forms, a record of an open bankruptcy proceeding, unfiled returns, and "frivolous” OICs filed for the sole purpose of delaying collection action. Additionally, if a taxpayer’s OIC is approved and accepted, but fails to pay their taxes within 5 years, their OIC can be retroactively rejected. Appeals can be made within 30 days of the IRS decision to reject.

While it’s often best to speak with a professional tax consultant, the IRS does provide an OIC Pre-Qualifier tool on their website. After answering a few questions, the tool with assess your current tax filing status, basic info, assets, income, expenses, as well as your proposal for OIC acceptance. Please note that this is just a preliminary assessment tool for you to use as a guide to examine whether you are eligible for the process. The IRS will still need to receive an official application for review and investigation. (Note: While the tool may show that you have the ability to pay your liability in full, you may still be able to file an OIC after reviewing your individual case with the IRS.)

If you have any questions or would like professional help in determining your eligibility, give us a call.