Offer in Compromise Alternatives: Tax Debt Relief

What to Do When an Offer in Compromise (OIC) Isn’t the Right Tax Relief Choice

An Offer in Compromise (OIC) lets qualifying taxpayers settle tax debt for less than owed, but it’s not the right option for everyone. The IRS’s Offer in Compromise application requires detailed financial information, and rejection rates are high for applicants who don’t work with a tax professional.

Luckily, it’s not the only option for relief. In this post, we cover the best Offer in Compromise alternatives, which could be vital in saving you both time and money. To receive personalized guidance today, contact us at East Coast Tax Consulting Group.

Key Takeaways

• The IRS approves just 30 to 40% of OIC applications, meaning that applying on your own is often a risky and time-consuming process.
• The application fees and initial payment are non-refundable, even if the IRS rejects your offer.
• The IRS may expect you to liquidate certain assets or modify your budget before approving your offer, which isn’t realistic for all taxpayers.
• Alternatives, such as a penalty abatement, Currently Not Collectible status, Partial Payment Installment Agreements, or even traditional Installment Agreements, may be better options for some taxpayers.
• Speak to a tax expert about your financial situation before deciding on the right approach.

Why Offers in Compromise Aren’t for Everyone

Chances are, you’ve seen advertisements promoting Offers in Compromise as a “fix-all” solution to tax debt. However, what these ads don’t tell you is that there are downsides to this program, and an offer is not always the best option for every taxpayer.

Let’s break down the most notable downsides and how an experienced tax professional can help. Then, we’ll look at alternatives.

Low approval rates from the IRS

The IRS accepts between 30 and 40% of all Offer in Compromise applications. That means two out of three taxpayers who apply get turned down. Additionally, you risk losing your application fees and initial payment even if the IRS says “no”.

How a tax professional can help: Working with a tax expert can reduce common mistakes and greatly increase your odds. Most experienced tax professionals don’t recommend this option unless they’re very confident that you’re a strong candidate for approval.

Strict financial requirements

The IRS uses a specific formula to determine what settlement you’ll qualify for. Typically, to get approved, an offer must include:

• 100% of your liquid assets
• 80% of the equity in non-liquid assets
• 12 or 24 months of disposable income

The IRS requires 12 months of disposable income if you’re paying in a lump sum (due within 5 months of offer acceptance). If you plan to pay in installments (available for up to a 24-month period, they look at 24 months of disposable income instead. While some nuances can come into play (for example, high healthcare costs or extenuating circumstances), the formula provides a good starting point.

How a tax professional can help: A tax professional can often get the IRS to take into account extenuating circumstances. In some cases, they can work with the IRS’s allowable financial standards to increase your monthly expenses while decreasing your offer.

Possible asset liquidation required

The IRS often expects applicants to liquidate certain assets and potentially modify their budgets. That could mean cashing out investments, selling your second car, or even moving to a more affordable home in rare situations. Making these serious lifestyle changes is no small feat and certainly not right for every taxpayer.

Non-refundable fees and initial payments

If you want to apply for an OIC, it will cost you money up front. First, there’s the $205 nonrefundable application fee, which may be lowered if you qualify for low-income certification. You will also need to make an initial payment alongside your proposal. The IRS will keep both your fee and your initial payment, whether they accept or reject your offer.

Long wait times with no guaranteed outcome

When you’ve submitted your application, you will then be faced with a long wait time. The IRS takes 6 to 12 months, or even longer in some cases, to review applications. While the agency will pause collection activities during this time, your account will continue to gather interest and penalties. That could leave you deeper in debt, especially if the outcome is a “no”.

Hidden Offer in Compromise Downsides

Aside from the obvious Offer in Compromise downsides, there are some hidden obstacles you may not have considered.

The IRS will return incomplete applications

The application requires detailed information about your finances and attachments such as bank statements, income sources, and details about any assets you have. If you don’t include everything or if you’re missing other requirements, such as having the last five years of returns filed, the agency may return your offer, adding even more time to the process.

You have to comply with the five-year rule

If the agency approves your application, that level of scrutiny continues. You will have to closely comply with tax filing and any payment requirements for the next five years. If you fail to do so, the IRS can void your agreement and demand full payment of the taxes.

You will lose tax refunds during the process

If you’re owed any tax refunds during the review process or through the year the offer is accepted, the IRS will seize them and apply them directly to your tax debt. However, those amounts don’t count towards your OIC offer.

When an OIC Might Make Sense

Of course, there are scenarios in which an Offer in Compromise (OIC) may be the right path. If you genuinely can’t repay your tax debt any other way, this approach can be a lifeline. Take a look at some of the main situations when you may want to apply for an OIC.

You have limited income and assets

If you’re living on a low income and have no significant equity in your assets, the OIC formula can work in your favor. Also, what counts as “low” income and assets is relative to the debt at hand. Someone settling a $500,000 bill may have a higher income or more assets than someone settling a $30,000 debt, for example, and still qualify.

You can pay something but not the full tax debt

An offer in compromise tends to be the best for taxpayers who can pay some but not all of the debt. The settlement amount varies based on your financial situation and any extenuating circumstances that may apply. For example, some taxpayers may settle a $50,000 liability for $500, while others may settle a $500,000 liability for $50,000 – please note, these numbers are purely for illustrative purposes. However, if you can’t pay anything, it’s generally not the right option.

You cannot pay off the full debt any other way

If you can’t pay the full debt without putting yourself in financial hardship, an Offer in Compromise (OIC) may be the way to go. However, the IRS will test this premise using the formula we’ve already mentioned. Even if this appears to be a smart option for your tax debt, it’s worth looking into Offer in Compromise alternatives to see if there’s a more fitting solution.

Additionally, you may want to consider an offer if there is a legitimate doubt that you owe the tax or if requiring you to pay would be inequitable. In these situations, you may want to apply for an offer based on doubt as to liability. Note, however, that this option has a slightly different application process and eligibility requirements than a standard offer in compromise.

Alternatives to Consider

An Offer in Compromise (OIC) is one option, but it’s not the only solution to tax debt. Here are some of the most popular alternatives. For best results, consult with a tax expert who can help you personalize a strategy based on your unique situation.

Installment agreements

Installment agreements let you pay off your tax debt in monthly payments. While you do have to pay back the total tax debt you owe plus any fees and penalties, you avoid the scrutiny of an OIC application. These agreements are often easier to qualify for, often offering you a flexible way to repay your taxes without putting you under financial strain.

You can personalize this solution based on what you can afford. Choose between short-term agreements (in which you pay in 180 days) and long-term agreements (which can be up to 120 months or until the Collection Statute Expiration Date (CSED) if sooner).

Currently Not Collectible (CNC) status

The Currently Not Collectible (CNC) status temporarily pauses any collection activities if you are not able to pay your back taxes now. The IRS puts your account on hold and doesn’t require any payments. Your debt will still accrue interest and penalties, but if you’re on CNC status until the CSED, you will not have to pay the tax debt.

When you’re dealing with temporary financial hardship, the CNC status gives you relief from your tax debt, allowing you to get back on your feet. The IRS reviews your financial standing periodically, and if it improves, they will start collection activities again.

Penalty abatement

If you want to reduce what you owe without deep financial scrutiny, penalty abatement may be the answer. This approach can remove or reduce any penalties you have on your account. However, to qualify, you will need to have a good history of compliance with the IRS or be able to show reasonable causes for any late payments or filings on your account.

You may also choose to combine a penalty abatement with other tax relief options to lower the total amount you owe. Reducing penalties could be a straightforward way to make your debt more manageable, without having to apply for an OIC.

Partial Payment Installment Agreement

A Partial Payment Installment Agreement allows you to repay part of the debt you owe via monthly installments. Your payments are based on what you can reasonably afford. The benefit of this is that you don’t have to repay any tax debt remaining after the collection statute expires. This is typically 10 years after the date the agency assessed your debt.

You must submit detailed financial information, just as you do with an offer in compromise, and if your finances improve, the IRS may require you to make higher payments. However, this can be a great option for taxpayers who don’t qualify for a settlement but can afford small monthly payments.

Get a Second Opinion

Before you decide which tax resolution strategy is right for you, speak to a tax expert. Getting professional advice is the best way to move forward armed with knowledge and confidence. A call to us at East Coast Tax Consulting Group could save you time, money, and stress. Don’t wait. Contact us today.

FAQs

What are the downsides of an Offer in Compromise (OIC)?

The IRS rejects the majority of OIC applications. During the review process, the agency scrutinizes your finances and may expect you to liquidate your assets and downsize your lifestyle. You risk losing time and money, including the up-front fee and payment.

Can I get my money back if the IRS rejects my OIC?

No. If the IRS rejects your OIC application, you will not get the fee or your initial payment back.

Is there a better option if I don’t qualify?

Yes. If you’re not eligible for an Offer in Compromise, there are other tax resolution options. You might consider a Partial Payment Installment Agreement, penalty abatement, the Currently Not Collectible (CNC) status, or an installment agreement.

Do I need a tax professional to apply?

While you can technically apply for tax relief alone, working with a professional will significantly increase your odds of success.

Is bankruptcy an alternative to an offer in compromise?

It depends. For some taxpayers, bankruptcy can be a good alternative, especially if they have other debts to discharge. However, not all tax debts are dischargeable, so an offer may be a better option depending on the situation.