OIC is a simple acronym that stands for “offer in compromise”. An offer in compromise refers to a type of agreement between the IRS and a taxpayer. When this type of settlement is agreed upon, the taxpayer pays less taxes than he or she originally owed. If the IRS believes the entire amount of taxes owed can be paid in full by the taxpayer, an offer in compromise deal will not be considered. The IRS also A taxpayer to pay the most they can reasonably pay, before accepting an offer.
Someone considering this type of settlement should remember that the IRS will usually reject an offer from a taxpayer if it is lower than the reasonable collection potential(RCP). This figure is arrived at by the value of the equity in the taxpayer’s property, cars, and bank accounts. It is one of the tests used to determine how much a person should be able to pay. The second is how much excess income a taxpayer has after deducting living expenses.
Taxpayers should be wary of scams and offers that advertise settling debts for extremely low dollar amounts. An OIC agreement is not likely to be that cheap, unless the person is really suffering financial hardship.
The IRS may only consider an OIC if there is considerable doubt that someone will not be able to pay the entire amount of taxes owed within the collection period. If there is doubt as to liability in the amount someone owes, the IRS may also consider an OIC. There can be doubt as to liability in many situations, such as if they can produce new evidence or show that an examiner failed to consider the taxpayer’s evidence.
Another situation in which an OIC may be accepted is if there are exceptional circumstances. This can be in the form of upcoming medical expenses or the expenses for an ill dependent child. Even if there is no doubt that the tax is correct and the person is liable, an OIC can sometimes be accepted if there are desperate circumstances that would cause economic hardships for the taxpayer.
If an offer in compromise is accepted, the taxpayer has options for repayment. They can choose to pay the settlement in a lump sum of cash, a short term payment plan, or a deferred payment plan.
An application for this type of settlement can be made by filing form 656 and paying the application fee. A typical application fee runs around $150. The first payment is often required when filing for this type of settlement.