by David A. Snyder, CPA, Managing Member, David A. Snyder CPA, PLLC
An Offer in Compromise (OIC) is an agreement between a taxpayer and the IRS that allows for settling a tax debt for less than the full amount owed. This option is generally considered when a taxpayer can’t pay their full tax liability or when paying the full amount would create a significant financial hardship.
PROS:
Debt reduction: The most significant benefit is the potential to substantially reduce your tax debt, potentially allowing you to settle for an amount consistent with your current financial ability to pay.
Asset protection: It can protect your assets and earnings from IRS collection activities like wage garnishments or asset seizures.
Final resolution: Can be a definitive resolution to a prolonged tax debt.
Suspension of collection activities: While under review, the IRS generally suspends other collection activities.
Fresh start: Can relieve the burden of tax debt, allowing you to regain financial stability.
CONS:
Strict eligibility requirements: The IRS has stringent qualification criteria, and an OIC generally is aimed at those with low income and limited assets.
Nonrefundable fees, payments: You generally need to submit a nonrefundable application fee ($205 for most taxpayers) and an initial payment with your application. These are applied to your tax debt even if the offer is rejected.
Accrual of interest and penalties: While the IRS is evaluating your offer, interest and penalties continue to accrue on your outstanding tax debt. If your offer is rejected, your total debt could be higher than when you started.
Potential for default: If you fail to meet the terms of the agreement, the IRS can terminate the OIC and collect the original tax debt, plus penalties and interest.
Other cons include: Possible rejection, intense financial scrutiny, several months to up to two-year process, and accepted offers become public record.
IMPORTANT CONSIDERATIONS:
Before applying for an OIC, consider other payment options like installment agreements or requesting a temporary delay in collection.
Be cautious of companies that make misleading promises about settling tax debt at steep discounts and charge excessive fees.
Consider consulting a qualified tax professional to help you determine if an OIC is the right option for you and to assist with the application process.
Know that providing false information on your OIC application can lead to serious consequences, including civil or criminal penalties.
