Are you struggling to pay off your tax debt? If so, then you may have heard about the IRS offer in compromise (OIC) program. You’re likely considering applying for the program, but will you get approved for tax debt relief?
Less than half (41%) of IRS offer in compromise applications are approved. One of the main reasons why an IRS OIC application gets denied is because the taxpayer didn’t qualify and applied without understanding the complicated program’s rules.
In 2022, things have gotten even more complex.
Starting in November of 2021, the IRS changed its IRS compromise policy. You’ll need to understand both the way the program works and the new changes before you attempt to apply in 2022.
Learn everything you need to know to get started on your application below.
Current IRS OIC Policy
First things first: How can the current IRS OIC policy help you if you’re a taxpayer with tax debt? To understand the answer, you have to know the basics of what an offer in compromise is.
An offer in compromise is a formal term for an agreement you make with the IRS. If you owe the agency a significant chunk of tax debt and you can’t pay it back, then it’s possible to come to an OIC with the tax agency.
In most circumstances, this agreement forgives some of the taxpayer’s tax debt while requiring some of that money be paid as soon as possible. In this way, an OIC is beneficial for both the IRS and taxpayers who honestly cannot pay back the entirety of what they owe.
There are three main types of OICs:
- An OIC for Doubt as to Collectibility happens when you can’t pay off the balance, even with your potential future income and assets.
- An OIC for Doubt as to Liability happens when you’re unsure if you really owe as much as the IRS says.
- An OIC for Effective Tax Administration happens when the taxpayer is going through an economic hardship that would warrant a reduction in the full amount of tax debt owed. In this last type of OIC, both the IRS and the taxpayer agree on the amount of tax owed and that it could get paid off in full if it wasn’t for the recent hardship situation. The hardship can’t be a temporary thing, either.
Most taxpayers that want to seek out an OIC apply for an OIC for Doubt as to Collectibility. Keep in mind that this type of OIC has the highest denial rate, too.
So, how do you know if your financial situation meets the standards required by the IRS to get accepted for an OIC?
When you apply for this type of relief, the IRS will immediately evaluate your entire financial situation and history. For the most part, the IRS won’t accept an OIC unless you offer to pay back more than the agency’s calculated “reasonable collection potential.”
Your reasonable collection potential is how much money the IRS thinks it could get from you if they levied their authority against you. In other words, if they seized your assets and could get more than what you’re offering to pay back, then they won’t accept an OIC.
If you offer to pay back more than the agency could collect through other methods, however, then they’ll be more willing to work with you and approve your application. The agency does consider your living expenses and living situation when calculating your personal reasonable collection potential. The agency will also take into account whether you have dependents or become disabled.
If you and the IRS come to an agreement, then you’ll need to keep up with your payments to the agency. You could pay back your debt in either one major lump sum or with periodic payments. If you want to make periodic payments, then it’s important to include your first proposed payment with your initial application.
New OIC Policy
Are you seeking out an offer and compromise with the IRS in 2022? You’ll need to know about two specific changes that went into effect in late 2021. These changes mainly impact the refund recoupment process and the ability for taxpayers to use a separate OBR remedy while their OIC situation is under review by the IRS. We’ll go over each of these changes in detail below.
Prior to these new changes, the IRS included a caveat when an OIC agreement was reached: The agency would keep any tax refund owed to the taxpayer through the calendar year in which the OIC gets accepted. Starting in late 2021, though, the IRS won’t offset, recoup, or keep the refunds during the year that the OIC gets accepted.
That’s great news for taxpayers!
In other words, if you apply for an offer in compromise with the IRS for the years 2015 and 2016, then your 2021 tax return is safe from getting withheld from you.
Many taxpayers avoid even applying for an OIC because they’re afraid that they won’t get their return for the current year. That’s because taxpayers who are facing economic hardship are often reliant on that yearly tax return. Offsetting the current year’s return, then, could cause further financial harm to the taxpayer seeking relief. For that reason, the IRS made the right decision in changing these rules.
An offset bypass refund (OBR) is another type of tax debt relief offered by the IRS. The IRS has the legal authority to offset or keep an overpayment or tax refund when the taxpayer owes a prior tax liability. When taxpayers are going through a financial hardship, sometimes the IRS will offer an OBR, which allows that overpayment to go directly to the taxpayer rather than the agency.
Prior to the recent changes, taxpayers that had pending OIC offers on the table couldn’t also apply for the OBR remedy. These changes reverse that, though, so now taxpayers can apply for the OBR remedy even if they have an OIC pending.
Again, this is great news for taxpayers who are hoping to seek an OIC in 2022 or beyond. With the ongoing Covid-19 situation, getting fast financial relief has never been more important. Getting an OBR is a real challenge, though, and there aren’t any specific forms to request this type of relief. Instead, it’s advised that you either contact the IRS directly or speak with a tax professional for help in getting an OBR.
Apply for an OIC
Clearly, it’s complicated and confusing to determine if you qualify for an OIC program. If you know you owe a tax debt, though, then you should definitely consider this option. If you have questions about your eligibility, then we advise speaking to a tax professional about potentially applying for an OIC.
If you’re sure you want to move forward with applying, then the first step you should take is to get all your finances in order. Next, you’ll need to fill out all the appropriate IRS forms. This step can get a little tricky, and you need to be very sure that you provide accurate information to the agency. Otherwise, you could risk having your application denied.
The forms you’ll need to fill out might include:
- Form 656 (Offer in Compromise)
- Form 433-A (OIC)
- Form 433-B (OIC)
- Form 656-L
- Form 656
The forms you’ll need to complete depend on the type of OIC you’re hoping to get approved for. Ask a tax professional if you need help figuring out which forms are appropriate in your situation. Finally, you’ll want to include an application fee and any first proposed payment.
Updates to the IRS Offer in Compromise Policy for 2022 and Beyond
Previous IRS offer in compromise rules may have discouraged some taxpayers from seeking out an OIC. Hopefully, the new changes implemented by the IRS in 2021 will help reverse that trend. After all, delinquent taxpayers who do end up paying off some of their tax debts are better than ones who never attempt to pay back anything towards what they owe.
If you currently owe the IRS a significant amount of money, then it’s normal to feel anxious. It makes sense to feel overwhelmed, too, especially if your tax debt goes back several years. Further inaction on your part isn’t recommended as we head into 2022. Rather than continuing to feel anxious and stressed, act now by reaching out to an expert tax representative who can help you get back on track.
At Tax Group Center, we’ve helped countless individuals and businesses successfully gain acceptance into the IRS OIC program. Our tax attorneys and licensed CPAs can help you with the Offer in Compromise process, too. Contact us to get started!