An Offer in Compromise (OIC) is a valuable IRS program that allows taxpayers to settle their tax debts for less than the full amount owed, provided they can demonstrate an inability to pay the full balance. However, the application process requires careful attention to detail to avoid common mistakes that can delay processing or cause outright rejection.
Understanding the Offer in Compromise Process
The OIC process begins with evaluating your financial situation to confirm if you meet the IRS’s criteria, especially “doubt as to collectibility,” meaning the IRS believes you cannot pay the entire debt based on your income, assets, and expenses. You then submit Form 656 along with Form 433-A (individuals) or 433-B (businesses), providing detailed financial disclosures.
The IRS carefully reviews your submission and supporting documentation to decide whether to accept, reject, or request additional information. If rejected, you can appeal or explore other tax debt relief options.
Common Mistakes in an Offer in Compromise Application
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Incomplete or Incorrect Financial Information: Omitting income sources, underreporting assets, or exaggerating expenses are frequent reasons for denial. For example, failing to disclose freelance income or bank accounts can signal to the IRS that you are hiding resources.
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Lack of Required Documentation: Each financial claim must be supported by documentation such as pay stubs, bank statements, or receipts. Missing attachments limit the IRS’s ability to verify your financial status.
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Submitting an Application Without Meeting Eligibility Requirements: Applicants must have filed all required tax returns and made all estimated payments. Ignoring these basic prerequisites risks automatic rejection.
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Failing to Include the Application Fee or Initial Payment: The IRS generally charges a non-refundable $205 application fee and requires an initial payment with the offer, except for those qualifying for a low-income waiver. Neglecting these payments delays the review or causes denial.
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Underestimating Your Future Ability to Pay: The IRS assesses your income potential going forward. Claiming inability to pay while having disposable income or assets can lead to refusal.
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Not Seeking Professional Assistance When Needed: Complex financial situations benefit greatly from a tax professional’s experience. Handling an OIC without expert guidance can increase errors.
Tips to Avoid Application Mistakes
- Review all forms carefully to ensure accuracy, including Form 656 and supporting financial statements.
- Collect all financial documents before applying—pay stubs, bank statements, and expense receipts.
- File all outstanding tax returns as the IRS requires full compliance.
- Understand and prepare the $205 application fee and initial payment unless you qualify for a waiver.
- Be honest and realistic about your financial condition, including income, assets, and expenses.
- Consider consulting a tax professional experienced with OIC applications.
- Keep track of deadlines to avoid automatic disqualification.
Real-Life Example
Jane owed $25,000 in back taxes. Initially, she submitted an OIC but failed to list some bank accounts and consulting income, leading to IRS rejection. After consulting a tax advisor and resubmitting her application with complete information and documentation, the IRS accepted her offer, settling the debt for $15,000.
Common OIC Application Mistakes and How to Fix Them
| Mistake | Solution |
|---|---|
| Incomplete income reporting | List all income sources with proper documentation |
| Missing financial documentation | Attach pay stubs, bank statements, and receipts |
| Failure to meet filing status | File all required past tax returns |
| Skipping application fee | Include the $205 fee or request a low-income waiver |
| Unrealistic payment offer | Submit a credible and verifiable payment offer |
| Ignoring deadlines | Track and meet all IRS submission deadlines |
Frequently Asked Questions
Q: Can I reapply if my Offer in Compromise is rejected?
A: Yes. You typically must wait 30 days before appealing or reapplying and correct any errors from the previous application.
Q: Is professional help expensive?
A: While it involves upfront costs, professional assistance often increases your chance of acceptance, potentially saving money long-term.
Q: Can I get a waiver for the $205 application fee?
A: Qualifying low-income applicants may request a fee waiver.
Additional Resources
- Visit the IRS Offer in Compromise page for official guidance.
- For consumer-focused advice, see the Consumer Financial Protection Bureau’s explanation.
Avoiding these common mistakes will improve your chances of successfully negotiating a tax debt settlement through an Offer in Compromise. Careful preparation and honesty with the IRS are key to a favorable outcome.
