If you listen to the radio or watch television, there is no doubt you have heard advertisements for companies offering to settle your tax debt. They typically will have a testimonial from a client (or customer) stating the “ABC company reduced my tax debt 90%” or something to that effect. While this is possible in certain circumstances, it is not the norm nor is it guaranteed. The typical means for reducing a tax debt is through a process called an Offer In Compromise, or OIC. There is no mystery about this process, and the form to submit an OIC is on the IRS’s website (Form 656-B). Information must be gathered, forms filed, and payments made in order to submit an OIC to IRS. To make it even clearer, when a taxpayer submits an OIC to the IRS, they must begin making payments (or 20% payment of the total amount in the OIC) at that time. The OIC has not been approved at that point and may be rejected by the IRS. Under the law, the IRS can take up to 2 years to approve or reject the settlement. If they do not act in that amount of time, the OIC is deemed to have been accepted.
If an OIC could drastically reduce your tax liabilities, why doesn’t everyone do one? There are two ways of qualifying for an OIC: whether you are liable for the debt, or whether the debt is collectible (liability is not discussed here, but one of the most common situations is what is known as the “innocent spouse”). The process is not there to bail-out taxpayers who just didn’t feel like paying or who just don’t want to pay it when it was due. The taxpayer must show that they cannot make payments on their tax debt, meaning they do not have disposable income to pay it all. Further, the IRS must believe that they are unlikely to ever receive full payment on tax debts from the taxpayer. Maybe the taxpayer is on a fixed income, or maybe the taxpayer must care for a disabled dependent. It cannot simply be that business is bad or that the taxpayer was laid off. Business could conceivably pick up; the taxpayer could find new employment. The IRS must deem the taxpayer to be “uncollectable”. Currently, only 34% of OIC’s are accepted by the IRS. There have been a number of explanations for this number by a number of different commentators. Having only a 1 in 3 chance of being approved should inform the taxpayer that OIC’s are neither common nor guaranteed. Keep this in mind when you hear commercials promoting OIC’s as the savior to all the tax debt concerns.