Millions of American today find that they are unable to pay their tax debt to the IRS. Their living expenses just pay for the essentials and have nothing left over for anything else. One way to get some IRS tax relief is to submit an Offer in Compromise (OIC) which is an agreement between the taxpayer and the IRS to settle their debt for less than what is owed. The offer made is evaluated by the IRS to determine if the taxpayer does not or will not have funds available to pay the lump sum or even to make periodic payments.
The IRS has strict guidelines regarding OICs. It looks at the taxpayers assets and makes its decision based on the taxpayer's ability to pay. It uses this reasonable collection potential (RCP) formula to look at the taxpayer's future income and decides if there is anything left over after basic living expenses are paid.
There are three types of Offers in Compromise. Doubt as to Collectibility is when there is reasonable doubt that the taxpayer will ever be able to pay the full amount of the debt. In at nutshell, this means that the taxpayer does not or just barely can pay for his or her necessary living expenses and probably will never be able to take on additional payments. Doubt as to Liability is when there is a question about the correctness of the assessed tax liability. The third type of OIC is Effective Tax Administration. This is when there is no doubt that the tax is correct and the IRS determines that the debt may be able to be collected. In order to be approved for this type of OIC, the taxpayer must show that collection of the tax would put an undue, unfair or inequitable hardship on him or her.
In order to file an OIC, the taxpayer can obtain Form 656-B (Offer in Compromise Booklet) to get the necessary worksheets, forms and other information necessary to complete the process. When submitting the OIC, Form 656 (Offer in Compromise) or Form 656-L (Offer in Compromise Doubt as to Liability) must be completed. Most taxpayers must also submit Form 433-A (Collection Information Statement for Wage Earners and Self-employed Individuals) and / or Form 433-B (Collection Information Statement for Businesses). By completing and submitting the appropriate forms, the taxpayer will be evaluated and at least considered for much-needed IRS tax relief