UPDATED: April 2024
An Offer in Compromise (OIC) allows individual and business taxpayers who can’t pay their full tax bill to settle their debt for a lesser amount with the IRS. There are specific eligibility requirements, and the process involves submitting Form 656 with supporting documentation.
Who Qualifies for an OIC?
The IRS considers two main reasons for approving an OIC:
- Doubt as to Collectibility: You can’t pay your full tax debt even after considering your future ability to earn income and assets you own.
- Effective Tax Administration: Paying the full amount would cause undue hardship. This hardship could be financial or due to exceptional circumstances.
Preparing Form 656
The cornerstone of your OIC application is Form 656. You can download the latest version along with instructions (Form 656-B) directly from the IRS website. Fill out the form meticulously, ensuring all relevant information is included.
Here are some key points to remember when completing Form 656:
- Joint Filers: If you’re filing jointly, include all joint tax liabilities on a single Form 656. If your tax liabilities are individual or held with different people, you’ll need separate forms.
- Social Security Numbers: Everyone submitting the offer needs to provide their Social Security Numbers.
- Business Owners: Include Employer Identification Numbers for any businesses you own (except corporations).
But Form 656 is just one piece of the puzzle. To strengthen your application, you’ll also need to gather a bunch of supporting documents.
Building a Strong Case: Must-Have Supporting Documents
The documents you submit with your OIC application play a crucial role in convincing the IRS to accept your offer. Here’s a list of essential documents to include:
- Tax Return Transcripts: Request transcripts for the past six years directly from the IRS.
- Tax Documents: Documentation for all tax years included in your OIC.
- Recent Pay Stubs: Paystubs covering the past three months.
- Financial Statements: Recent bank and credit card statements (past three months), mortgage statements, loan statements, and brokerage statements.
- Retirement Savings: Statements for your retirement accounts (401k, etc.).
- Investment Documentation: Documentation of all your investments.
- Living Expenses: A detailed breakdown of your monthly household expenses for the past three months, including housing, food, transportation, healthcare, and other essential costs.
Pro Tip: Don’t just limit yourself to this list. Consider including any additional documentation that strengthens your claim of hardship or inability to pay.
Extra Tips for a Smooth OIC Application
Here’s what you need to know about applying for an OIC and how to increase your chances of getting approved.
- Complete is Key: Missing documents can significantly delay the processing of your application. Ensure you gather and submit everything required.
- Make Copies: Always keep copies of everything you submit for your records.
- Seek Professional Help: The OIC process can be complex. Consider consulting a tax professional for guidance, especially if your tax situation is intricate.
Remember: There are associated fees with applying for an OIC. The current application fee is $205 (subject to change) and you’ll also need to make a non-refundable initial payment with your offer. Processing times can vary, so be patient.
By following these steps and carefully preparing your OIC application, you can significantly increase your chances of successfully settling your tax debt with the IRS. Remember, the key is to demonstrate your eligibility and provide a compelling case for why settling your debt benefits both you and the IRS.
Tax season can be stressful, but what if you find yourself facing a mountain of unpaid taxes you simply can’t afford to settle in full? The IRS Offer in Compromise (OIC) program might be a lifesaver. It allows eligible taxpayers, both individuals and businesses, to settle their tax debts for a reduced amount.
Photo by Kelly Sikkema