If you owe money to the IRS, you may have heard that you can settle your debt for pennies on the dollar. This is called an Offer in Compromise (OIC), and is a tax resolution tool that allows individuals to settle their tax debt for less than the full amount owed. The IRS grants these settlements only under specific circumstances, making it essential to understand the qualifications before applying. While an OIC can provide significant financial relief, the IRS does not approve every offer. For this reason alone, individuals who intend to submit their respective offer must understand the different factors impacting the acceptance of an offer.
Different Categories of Offers in Compromise
The IRS classifies an OIC application based on three primary factors:
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- Doubt as to Collectibility (DATC) – The IRS assesses whether it is unlikely to collect the full tax debt from the individual. This is determined by comparing the individual’s income, expenses, and assets to their total outstanding tax liability. If the IRS believes it cannot collect the full amount, it may accept a reduced settlement. This is the most frequent type of offer.
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- Doubt as to Liability (DATL) – This offer is used exclusively when the taxpayer disputes the validity of the tax assessment. In other words, the taxpayer disputes the amount of tax owed, claiming it was incorrectly assessed due to errors in tax law interpretation, calculation mistakes, or missing information. The taxpayer must provide sufficient documentation to support the claim. If the offer is accepted, the IRS will accept that the tax assessed was improper, and remove the liability from the account.
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- Effective Tax Administration (ETA) – Even if the individual has the means to pay, the IRS may still grant an OIC if paying the full amount would cause undue economic hardship or if other exceptional circumstances make full collection unfair or inequitable. This applies to cases involving elderly individuals, those with serious medical conditions, or individuals in other hardship situations.
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IRS Application Fees and Waivers
When submitting an Offer in Compromise, individuals must generally pay a $205 application fee to the IRS. Additionally, if submitting a lump-sum cash offer, the individual must include an initial payment of 20% of the proposed offer amount. For a periodic payment offer, the individual must continue making installment payments while the IRS reviews the application.
However, low-income individuals may qualify for a fee waiver. The IRS provides a waiver for individuals whose adjusted gross income (AGI) falls at or below 250% of the federal poverty guidelines based on household size. If an individual qualifies for this waiver, they are not required to pay the application fee or make an initial payment while the IRS reviews the offer. This waiver ensures that financially struggling individuals can still access the Offer in Compromise program without an upfront financial burden.
Different Payment’s Options for an Offers in Compromise
The IRS allows individuals to submit different types of OICs, depending on their specific circumstances:
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- Lump-Sum Cash Offer – The individual must pay 20% of the offered amount upfront, with the remaining balance due within five or fewer payments. This option is preferable for individuals with access to some liquidity.
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- Periodic Payment Offer – Payments are made in installments over a maximum of 24 months. While the IRS reviews the offer, the individual must continue making payments under the proposed plan.
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- Doubt as to Liability Offer – In this case, deposit is not required, and the IRS must determine whether the taxpayer truly owes the amount in question.
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- Effective Tax Administration Offer – This applies when the individual has the financial ability to pay but can demonstrate that doing so would cause significant hardship.
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Example of a Qualifying Case
Consider John, a self-employed contractor who accumulated a $75,000 tax debt due to underreported income and penalties over several years. After experiencing a medical condition that limits his ability to work, John’s monthly income is now only $3,500, while his necessary expenses (rent, utilities, food, and medical costs) total $3,200.
John owns a vehicle worth $5,000 and has minimal savings. After reviewing his financial situation, the IRS determines that full collection is unlikely and that pursuing aggressive collection efforts would create economic hardship.
John applies for an Offer in Compromise under “Doubt as to Collectibility” and offers to pay $7,500 over 24 months. Given his circumstances, the IRS accepts his offer, allowing him to settle his tax liability for a fraction of the total amount owed.
Relevance for Individuals
The Offer in Compromise program is a powerful tool for individuals who cannot afford to pay their full tax debt. However, qualifying for an OIC requires a thorough financial evaluation and strategic preparation. If you believe you may qualify, working with a tax attorney can significantly improve your chances of approval by ensuring your application is properly structured and well-documented.
For individuals and businesses in Plano, Dallas, Fort Worth, and the greater DFW Metroplex, struggling with IRS problems, consulting an experienced tax attorney is crucial. Juarez Hernandez Tax Law specializes in tax resolution strategies, including IRS audits, penalty abatements, and tax litigation. Whether you are a business owner facing back taxes or an individual seeking relief from overwhelming tax debt, Juarez Hernandez Tax Law can provide expert guidance. If you are searching for a tax attorney in Plano, TX, or a tax lawyer in the Dallas-Fort Worth area, our firm is ready to help you navigate the complexities of IRS negotiations and achieve the best possible outcome for your case.