How Long to Complete IRS Offer In Compromise

IRS Offer in Compromise: Timeline, Process, and Potential Settlement Amounts

For taxpayers overwhelmed by federal tax debt, an IRS Offer in Compromise (OIC) can be a lifeline, allowing them to settle their tax liabilities for less than the full amount owed. However, the OIC process is complex, time-consuming, and requires careful preparation to maximize the chances of approval. This tax lawyers OIC guide explores the common question regarding how long it takes to complete IRS Offer in Compromise (OIC) from start to finish.

What is an IRS Offer in Compromise?

An Offer in Compromise is an IRS program that enables qualifying taxpayers to settle their tax debt for a reduced amount when paying the full liability is not feasible or would cause financial hardship. The IRS evaluates an OIC based on three grounds:

1. Doubt as to Collectibility:
2. Doubt as to Liability:
3. Effective Tax Administration:

The most common basis for an OIC is doubt as to collectibility, which focuses on the taxpayer’s ability to pay based on their financial situation.

IRS OIC Process: Step-by-Step

The OIC completion time varies based the nature of the case. However, all IRS OIC process involves several stages, from eligibility checks to final IRS review. Below is a detailed breakdown of the steps involved:

1. Pre-Qualification and Eligibility Check

Before submitting an OIC, taxpayers must confirm eligibility. The IRS requires:

• All tax returns filed and current.
• All required estimated tax payments made for the current year.
• No open bankruptcy proceedings.
• For businesses, all federal tax deposits for the current and prior two quarters.

2. Preparing and Submitting the OIC Application

Preparing an OIC application is meticulous and requires gathering extensive financial documentation. The key forms include:

• Form 656, Offer in Compromise: Outlines the proposed settlement amount and payment terms.
• Form 433-A (OIC) (for individuals) or Form 433-B (OIC) (for businesses): Detailed financial statements covering income, expenses, assets, and liabilities.
• Supporting documents, such as bank statements, pay stubs, and proof of expenses.

Taxpayers must also submit a $205 application fee and an initial payment. Payment options include:

• Lump Sum Cash: 20% of the offer amount submitted with the application, with the balance paid in five or fewer payments.
• Periodic Payment: An initial payment with monthly installments during IRS review, continuing until the offer is paid in full if accepted.

3. IRS OIC Timeline – Initial Review

Once submitted, the IRS reviews the OIC application for completeness. If the application is incomplete or the taxpayer is non-compliant (e.g., missing tax filings), the IRS will return the application without further review. If processable, the IRS sends a letter confirming receipt and providing an estimated contact date. This initial processing typically takes 1-2 months, depending on IRS workload and inventory levels.

4. IRS Investigation and Evaluation

The IRS assigns an offer examiner to conduct a thorough financial investigation, assessing the taxpayer’s Reasonable Collection Potential (RCP). The RCP is calculated as:

RCP=(NetEquityinAssets)+(DisposableIncome×MonthsRemaininginCollectionPeriod)RCP = (Net Equity in Assets) + (Disposable Income \times Months Remaining in Collection Period)RCP = (Net Equity in Assets) + (Disposable Income \times Months Remaining in Collection Period)

• Net Equity in Assets: The fair market value of assets (e.g., real estate, vehicles, bank accounts) minus liabilities, with IRS discounts for quick-sale values.
• Disposable Income: Monthly income minus allowable expenses (based on IRS National Standards for necessities like food, housing, and transportation).

The IRS typically uses a 12-month multiplier for lump-sum offers or a 24-month multiplier for periodic payment offers to project future income. The offer amount must generally equal or exceed the RCP for acceptance.

5. OIC Decision and Negotiation (1-3 Months)

The IRS will either:

• Accept the Offer: If accepted, the taxpayer receives written confirmation and must fulfill payment terms (lump sum within five months or monthly payments for up to 24 months). Tax liens are released upon full payment.
• Reject the Offer: The IRS provides a rejection letter, and the taxpayer has 30 days to appeal using Form 13711, Request for Appeal of Offer in Compromise. Appeals can add 1-3 months to the process.
• Return the Offer: If the application is incomplete or the taxpayer becomes non-compliant, the offer is returned without appeal rights.

If the taxpayer disagrees with the IRS’s valuation of assets or income, they can provide additional documentation or request Fast Track Mediation (if eligible) to resolve disputes.

How Long to Complete IRS Offer In Compromise

The entire OIC process, from pre-qualification to final decision, typically takes 7-24 months, with an average of 12-18 months. Below is a visual representation of the timeline:

1. Reasonable Collection Potential (RCP)

The RCP formula is critical:

RCP=(Quick−SaleValueofAssets−Liabilities)+(MonthlyDisposableIncome×12or24)RCP = (Quick-Sale Value of Assets – Liabilities) + (Monthly Disposable Income \times 12 or 24)RCP = (Quick-Sale Value of Assets - Liabilities) + (Monthly Disposable Income \times 12 or 24)

• Assets: The IRS assigns a quick-sale value (typically 80% of fair market value) to assets like homes, cars, and bank accounts, reduced by any loans or liens.
• Disposable Income: Calculated as gross monthly income minus allowable expenses. The IRS uses National Standards for expenses, which may be lower than actual spending, reducing disposable income flexibility.

For example, consider a taxpayer with $500,000 in Tax Debt with following assets:

• Assets: Home with $100,000 equity (quick-sale value: $80,000), car with $5,000 equity.
• Monthly Income: $7,000.
• Allowable Expenses: $6,500 (per IRS standards).
• Disposable Income: $7,000 – $6,500 = $500/month.

For a lump-sum offer (12-month multiplier): RCP = $80,000 + $5,000 + ($500 \times 12) = $91,000

Example 2:

• A taxpayer owing $1,000,000 with minimal assets and low disposable income might settle for $10,000-$20,000.
• A taxpayer with significant assets or income might need to offer closer to $50,000-$80,000 to meet their RCP.

Figure 2: Hypothetical OIC Settlement Outcomes

3. Factors Influencing Settlement

• Low-Income Status: Taxpayers with low income and lower RCP calculations can expect reducing the offer amount.
• Economic Hardship: Demonstrating exceptional circumstances (e.g., medical expenses, disability) can justify a lower offer under effective tax administration.
• Asset Valuation Disputes: Taxpayers can negotiate asset valuations by providing appraisals or evidence of lower marketability, potentially reducing the RCP.

Contact Us.

Our experienced tax attorneys and CPAs have successfully guided countless clients through the OIC process, saving them millions in tax debt. We provide personalized strategies to maximize your chances of approval and minimize your settlement amount.

For personalized assistance with your OIC Settlement, contact us at 310 788 9820 or email us for a consultation.