An Offer in Compromise (OIC) is a valuable IRS program allowing taxpayers to settle their tax liabilities for less than the full amount owed when paying the full amount would cause financial hardship or be otherwise unfair. However, to qualify and secure approval, applicants must submit thorough and accurate documentation, including detailed financial disclosures.
Many taxpayers stumble over common errors during the preparation and submission of their OIC applications, which often result in rejection or significant processing delays. Understanding these common pitfalls can help you avoid unnecessary setbacks and improve your chances of reaching a successful agreement with the IRS.
Common Application Pitfalls Explained
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Incomplete or Missing Documentation: The IRS requires proof of income, expenses, assets, and liabilities. Failing to provide essential documents such as recent pay stubs, bank statements, expense bills, or asset valuations can lead to outright denial of your offer. Double-check all requested paperwork before submission.
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Inaccurate Reporting of Income and Expenses: Both overstating expenses and understating income are risky. Overstated expenses may be flagged and verified by the IRS through third-party sources, potentially causing rejection. Underreported income reduces your offer’s credibility and lowers your chance of acceptance. Be precise and use verifiable records.
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Skipping Required Forms or Schedules: The OIC process involves submitting Form 656 and supporting financial information forms like Form 433-A (OIC) for individuals or Form 433-B (OIC) for businesses. Omitting any of these required forms is like submitting an incomplete puzzle and often leads to processing delays or rejections.
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Failing to Stay Current on Tax Filings: A mandatory qualification is filing all required tax returns. If you have any unfiled returns, the IRS will typically reject your offer automatically. Ensure all prior filings are complete and up to date before applying.
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Improper Payment of Application Fee and Initial Offer Payment: The IRS charges a non-refundable application fee (currently $205 unless you qualify for a low-income waiver) and requires an initial payment with your offer (either 20% for lump sum or the first installment in periodic payment plans). Failure to make these payments or errors in payment processing cause processing delays.
Tips to Avoid These Pitfalls
- Thoroughly review all documentation requirements provided by the IRS and include every requested item.
- Use the IRS Offer in Compromise Pre-Qualifier tool available on their website to assess your eligibility before applying.
- File or amend any missing tax returns to stay compliant.
- Maintain honesty and accuracy in reporting financial information; the IRS cross-checks income and assets with third parties.
- If your financial situation or tax history is complicated, consider consulting a qualified tax professional experienced with OIC applications.
Who Should Consider an Offer in Compromise?
Taxpayers unable to pay their full tax debt due to financial hardship, insolvency, or other valid reasons may find OIC a viable solution. However, because the IRS requires strong evidence of inability to pay, preparing a flawless application is critical to success.
Real-World Example
Consider Jane, who owes $25,000 in federal tax debt but can realistically afford to pay only $10,000. She submits an OIC but omits her most recent bank statement and forgets to pay the application fee. As a result, the IRS rejects her application, delaying relief and forcing her to reapply with a complete and accurate submission.
Summary Table: Common Pitfalls and How to Fix Them
| Pitfall | Effect | How to Fix |
|---|---|---|
| Missing Documentation | Automatic rejection | Gather and verify all required documents |
| Inaccurate Financial Info | Lower chances of approval | Use exact and verifiable income and expense records |
| Missing Forms | Delays or rejection | Complete all required IRS forms, including Form 656 and Form 433-A/B |
| Unfiled Tax Returns | Automatic denial | File all outstanding tax returns before applying |
| Incorrect Fee Payment | Processing delays | Pay application fee and initial offer payment correctly or request fee waiver when eligible |
Frequently Asked Questions
Can I reapply if my Offer in Compromise is rejected? Yes, you can reapply after correcting errors and demonstrating changes in your financial condition. Learn more about reapplying on FinHelp’s guide to reapplying for an Offer in Compromise.
Will hiring a tax professional improve my chances? Often yes. Tax professionals understand complex OIC requirements, help avoid common mistakes, and present your case effectively.
For comprehensive guidance, see the IRS’s official Offer in Compromise page.
Avoiding these common application pitfalls by being organized, accurate, and thorough will increase your chances of successfully resolving your tax debt through an Offer in Compromise.
