An Offer in Compromise (OIC) is a program offered by the IRS that allows taxpayers to settle their tax debt for less than the full amount owed if they can demonstrate that paying the full amount would cause financial hardship. The OIC is typically used when taxpayers cannot afford to pay their tax debt in full, and the IRS determines that accepting a partial payment is more practical than trying to collect the full debt.
There are three grounds for the IRS to accept an Offer in Compromise:
- Doubt as to Collectibility: The taxpayer is unable to pay the full amount due to financial limitations.
- Doubt as to Liability: The taxpayer disputes the amount of the tax debt.
- Effective Tax Administration: The taxpayer can pay the debt, but doing so would cause economic hardship.
To apply for an OIC, taxpayers must submit Form 656 and provide a detailed financial disclosure using Form 433-A (for individuals) or Form 433-B (for businesses). The IRS will review the taxpayer’s income, expenses, assets, and liabilities to determine whether the offer is acceptable.
If the IRS accepts the offer, the taxpayer agrees to pay the settled amount, either in a lump sum or over time, and the IRS forgives the remaining debt. However, the taxpayer must remain in compliance with tax obligations for the next five years after the offer is accepted.