The Offer in Compromise (OIC) program, commonly abbreviated as OIC, allows taxpayers to potentially resolve their tax debt obligations with the Internal Revenue Service (IRS) for a lesser payment than the total amount originally owed.
When successful, an OIC approval can help taxpayers find improvements in tax problems and fix their financial situation. However, submitting a successful OIC application demands thoroughness and precision.
Many individuals who have applied improperly in the past have made errors that undermined the approval of their offers. To avoid jeopardizing the outcome, extreme care is needed when filling out OIC forms and providing the required documents and information.
OIC Application Guide
This article will highlight the three most prevalent mistakes people make when submitting their Offer in Compromise (OIC) applications. Getting your OIC paperwork completed accurately from the start is essential.
The Internal Revenue Service (IRS) only permits one pending OIC submission at a time. So, if your initial filing gets rejected or returned, you must restart the entire multi-month process from square one. That translates to additional costs, prolonged waiting periods, and preventable stress.
Through assisting many clients over the years, we’ve observed how simply correctable errors have derailed otherwise qualified OIC applications, wasting clients’ valuable time and financial resources.
Following the guidance covered here will help you ensure your submission shines positively for the IRS officers to review it. We’d like to help you submit a solid OIC package equipped for approval on the first try.
Understanding the OIC Application Process
Before getting into the specifics, it’s helpful to understand the basic OIC process. When submitting an OIC application, you ask the IRS to set aside past financial disagreements and forgive some or all of your outstanding tax debt in exchange for a one-time payment lower than the full amount owed.
This is only possible if you satisfy certain eligibility standards and can prove to the IRS through documentation that paying the taxes owed in full would cause genuine financial hardship.
Eligibility Criteria for OIC
You must fulfill the IRS’s eligibility criteria to be eligible for an OIC. The agency evaluates your income, expenses, assets, and borrowing power to calculate what monthly payment you reasonably can afford.
It will only be allowed if they determine you have the financial means to pay more than the amount you submitted for the offer. Thorough documentation is vital to demonstrate eligibility.
Required Documentation
To back up the financials you report, you need supporting documentation like bank and investment account statements, pay stubs, expense receipts, property valuations, and more.
Without a complete paper trail, the IRS will assume you’re hiding money and underreporting your ability to pay. This is why accurate record-keeping is critical from day one of tax filing.
The 3 Critical Mistakes to Avoid
Now that we’ve reviewed the general OIC application process and eligibility requirements let’s examine the most frequent mistakes people make when submitting their offers.
Avoiding these common blunders will save you significant time and aggravation. A successfully processed OIC application is crucial for resolving your tax issues, so it’s important to understand the pitfalls to avoid making costly errors.
In the following sections, we’ll cover the three most common issues that can jeopardize an offer’s approval if not addressed properly.
Underestimating Your Assets and Income
The number one reason OICs get rejected is due to unreported income or undervalued assets. When you can compile your application, please be hyper-vigilant about listing everything correctly.
Double-check bank accounts, investment holdings, business equity, expected inheritances, or lawsuit payouts. Err on reporting too much rather than too little. Many folks mistakenly think assets like home or retirement accounts don’t count, but the IRS considers them fair game.
We once had a client apply, believing his vacant lot “didn’t count” since it wasn’t generating income. Not only did the IRS find out about it during the investigation, but they also valued it higher than he reported and denied his OIC alone. Accurate financial disclosure is job one, so leave no stone unturned when preparing your records. If in doubt, disclose it!
Ignoring the IRS’s Correspondence
The IRS expects timely responses to any requests, whether it’s additional documentation for your application or general tax correspondence. OICs get rejected simply because people took too long to reply to normal monthly payment reminders or audit notices unrelated to the offer.
Even if you’re working with a tax pro, you must sign forms and submit information as soon as possible. The IRS may close your case for non-response and make you start over from square one.
Also, please pay attention to certified mail notices or notices of intent to levy or lien. These enforcement actions continue while your offer is pending and cannot help settle if something slips through the cracks. Please set up calendar reminders and regularly follow up with your rep to avoid this easily avoidable mistake. An organized paperwork trail is your best defense.
Filing the Application Without Professional Help
Do-it-yourself OIC applications fail mostly because of missed steps, calculation errors, or insufficient evidence. The OIC review process is thorough and complex enough that professional guidance is highly recommended.
Tax attorneys and enrolled IRS agents are well-versed in the ins and outs of what will catch the IRS’s eye during investigations. They know how to value assets properly, project future income, document expenses believably, respond to requests, and negotiate for the best possible terms.
A representative can also spot potential problems or red flags in your application before it’s too late to fix them. We’ve seen firsthand how effective representation leads to more efficient processing and higher acceptance rates than solo efforts.
We once helped a client whose self-prepared submission was returned three times for revisions. After hiring our firm, we resubmitted with improved documentation and full financial disclosure. Guess what? It was approved within 90 days. Don’t roll the dice on this yourself!
Understanding the OIC Application Process
Now that we’ve covered the primary pitfalls, let’s review how to prepare and submit an OIC application successfully. The following seven steps will help optimize your chances of acceptance when done right:
- Compile all your back tax returns, W-2s, 1099s, K-1s, bank/financial statements, bills, pay stubs, and other income/expense evidence from the past 12 months.
- Carefully report your assets, income sources, deductions, and debts using IRS Form 656 or Form 433-A/B as applicable. I’d like you to please attach supporting documentation.
- Calculate your reasonable collection potential (RCP) using the IRS guidelines to determine an appropriate offer amount. You can consult a tax pro for help with valuations if needed.
- Complete Form 656 with the required payment options and sign the Certification of Unpaid Tax section. Please include the initial payment, if applicable.
- Make copies of everything for your records and send the original application with all attachments to the IRS offers in the compromise processing unit in Laguna Niguel, CA.
- Maintain compliance during the investigation period, which averages 6-12 months. Potentially negotiate further if asked for a higher amount.
- When accepted, enjoy a fresh start with your tax issues behind you! Most accepted offers are fully paid off within 24 months.
Taking the time to ensure accuracy and completeness throughout this process increases your chances of approval. Even small mistakes or gaps could trigger extra review cycles or rejection. So, double and triple-check it all with an experienced practitioner before submitting.
Conclusion to Avoid Confusion
The stakes of getting an OIC application wrong are very high, yet often avoidable with care and diligence. Filing for tax services through this program can feel overwhelming, given how much rides on every word.
That’s why seeking professional guidance from start to finish is important, as well as avoiding common pitfalls that cost valuable time and money in the long run. If done right, an Offer in Compromise presents a fresh start from your tax troubles. Best of luck in navigating the process!
To recap, getting your OIC application right is crucial. If you don’t fully and accurately disclose your financial details, comply with IRS requests, or seek professional guidance, it can be a good idea for an otherwise qualified offer.
But by avoiding these common pitfalls, your submission has a greater chance of being processed efficiently and approved. If you need help with tax debt and need help with the next steps, help is available.
At American Tax Defense, our experienced Enrolled Agent practitioners stand by to evaluate your unique situation and tax consultancy. We can help with all phases of preparing and submitting an OIC application, from compiling documentation to negotiating for you.
Our clients benefit from validated forms, insight into potential issues or red flags, and proven strategies that maximize approval odds. Rather than facing the OIC process alone, let American Tax Defense be your guide to settling your tax problems.
Please get in touch with us today to schedule a free initial consultation and see if you qualify for this life-changing program. Take action quickly – your financial future is worth getting expert guidance. Let’s discuss how we can help resolve your IRS tax debt.
