IRS Offer in Compromise (OIC) Preparation Guide
Not everyone pays their taxes on time. Sometimes there are extenuating circumstances, such as losing your job or suffering a family emergency. Even so, the IRS has a reputation for recording who has failed to file a tax return, or who has recurring debt through the years and missed a payment. Consider how the historic gangster Al Capone was finally arrested for tax evasion and not for his other extensive crimes.
Contrary, to what you may see in movies or with murderous gangsters, the IRS will not toss you into jail at the sign of the first missed tax payment. There are applications you can fill out for extensions, installment agreements, or a means to settle an accumulated debt. An Offer In Compromise is one option to allow you to get a clean slate when you can pay your taxes but would suffer financial hardship. It also applies when you cannot clear an accumulated debt.
What Is The IRS Offer In Compromise?
The OIC is a compromise that allows you to pay a smaller amount on your tax debt. An individual has to send an offer for an OIC that the IRS can either accept or reject. An incentive to use this is when paying your taxes will cause short-term stress and liability or when you cannot pay the full debt.
First, you need to be eligible to submit an OIC. You must have filed all your tax returns, received a bill from the IRS, make required payments for the federal year and deposits for the quarter at which you make the offer. Factors such as age, income, and education level will also factor into the IRS deciding to qualify you or not. Lifestyle is probably the hugest factor since the IRS will look at your cost of living, the homes, and cars you own, and any hint of financial irresponsibility.
As you can imagine, you need an influx of cash to get started on paying less debt to the IRS. You also need to prove that you can pay the money, but doing so would be deleterious in the long run. This is called effective tax administration.
Collectibility and liability are two other factors that can allow you to request an OIC. In the case of collectibility, the doubt is when the taxpayer cannot pay their full debt. Doubt as to liability is when the amount of estimated taxes owed are proven incorrect or assessed with erroneous means.
You need to file Form 456 to make the compromise offer. The form outlines an agreement and has a waiver for the mandatory application fee. Form OIC lists all of the income that you have, as well as assets.
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