Is an Offer in Compromise Your Path to Tax Debt Freedom?
The burden of a significant tax debt can be crushing. The stress of constant collection notices, the fear of losing your assets, and the feeling of a financial life spiraling out of control can be overwhelming. But if you have an unpaid tax liability that you simply cannot afford to pay, you may have a powerful path to relief: an Offer in Compromise (OIC).
An OIC is an agreement between a taxpayer and the IRS that allows you to settle your tax debt for less than the full amount you owe. This program is not for everyone, and the application process is complex. At Infinity Resolution, Principal and Enrolled Agent Michelle Hiller helps individuals and small business owners in the Houston, Texas area determine if an OIC is the right solution for their unique situation.
What is an Offer in Compromise?
An Offer in Compromise is a formal IRS program that provides a way for taxpayers to get a financial fresh start. The IRS may agree to an OIC when it's unlikely that the full amount of tax can be collected within the time limit for collections. The IRS is willing to accept a compromised amount if it’s more than they could reasonably expect to collect through other means, such as liens, levies, and payment plans.
It's crucial to understand that an OIC is a privilege, not a right. The IRS is under no obligation to accept your offer, and a poorly prepared application can be a costly mistake in both time and money.
The Three Types of OICs
The IRS may accept an OIC for one of three reasons:
Doubt as to Collectibility: This is the most common reason. It means there is doubt that you could ever pay the full amount of tax you owe. The IRS will analyze your financial situation—your income, expenses, and assets—to determine your Reasonable Collection Potential (RCP). Your offer must be equal to or greater than this amount.
Doubt as to Liability: This applies when there is a genuine legal dispute as to whether you actually owe the tax debt. For example, if you believe the IRS assessed the wrong amount of tax or incorrectly determined your filing status. This is a rare and difficult OIC to get.
Effective Tax Administration (ETA): This is for unique situations where there is no doubt that the tax is owed and collectible, but requiring payment in full would cause an economic hardship or be unfair due to exceptional circumstances. This could apply if you have a serious medical condition or a long-term disability that makes it impossible to pay the debt.
Key Eligibility Requirements
Before you can even be considered for an OIC, you must meet some strict eligibility requirements. The IRS will reject your application immediately if you:
Have not filed all required federal tax returns.
Are in an active bankruptcy proceeding.
Are a business owner who has not made all required federal tax deposits.
In short, you must be in complete compliance with the IRS to even begin the OIC process. This is especially true for Houston's small business community, including truckers and salon owners, who must ensure their payroll tax deposits are up to date before filing an OIC.
The Texas State Tax Situation
Many taxpayers facing federal tax debt also have state tax problems. It's important to understand that the state of Texas has a unique tax landscape. There is no state individual or corporate income tax. However, the Texas Comptroller of Public Accounts does have the power to collect other taxes, most notably sales and use tax and the Modified Business Tax.
While the Texas Comptroller's office does not have a formal Offer in Compromise program like the IRS, they do offer tax resolution services and have the authority to accept installment agreements and other payment arrangements to help taxpayers resolve their liabilities.
The Application Process and Common Pitfalls
Applying for an OIC is not as simple as sending a letter to the IRS. The application package includes Form 656 and a detailed financial statement (Form 433-A for individuals or Form 433-B for businesses). You will need to provide extensive documentation, including bank statements, pay stubs, and expense records.
Common reasons for rejection include:
Offering an amount that is too low.
Failing to provide all required documentation.
Not being in compliance with tax filings or payments.
Not having a strong argument for your offer.
It’s important to remember that during the time your OIC is being reviewed, interest and penalties on your tax debt continue to accrue. If your offer is rejected, your total debt will be even higher than when you started.
The Importance of Professional Guidance
Navigating the OIC process requires a deep understanding of tax law and IRS procedures. Without professional guidance, you risk having your offer rejected and wasting valuable time and money.
Michelle Hiller, EA, is a federally licensed tax professional who has the expertise to help you. She can evaluate your case, determine if you are a good candidate for an OIC, prepare a strategic offer, and negotiate with the IRS on your behalf. Her extensive experience with the unique financial situations of Houston-area small business owners gives her a clear advantage.
Don’t let tax debt control your life. Contact Infinity Resolution in Houston and proudly serving all of Texas, at (281) 796-1143 for a consultation today.