An offer in compromise (OIC) is an IRS tax relief program that allows eligible taxpayers to settle outstanding balances for less than they owe.
There are two types of Offer in Compromise that the IRS accepts. The most common OIC payment options are summarized below.
A lump sum is defined as an “offer payable in 5 or fewer installments” and must be paid within five or fewer months after the IRS accepts.
A lump sum OIC must include a 20% non refundable payment equal to the number of the offer amount.
Let’s break this down.
For example, you owe $30,000 in back taxes and offer to settle your taxes with a lump sum of $20,000.
When you submit your OIC, you must include 20% of the lump sum offer, which in this example, would be $4,000.
If the IRS accepts your OIC, they will take the $4,000, and you will now owe the remaining $16,000 over the next five or fewer months.
It is important to note that the 20% lump sum due upfront is nonrefundable and does not guarantee that the IRS will accept your offer.
Regardless if the offer is accepted or denied, the IRS will keep the 20% and apply it to your overall balance.
Not everyone can afford to throw down an entire lump sum. Thankfully there are more options.
A payment plan consists of six or more monthly installments to conclude within 24 months after the IRS accepts the offer.
You must include the first payment and an application fee when submitting a payment plan offer.
For example, let’s say you owe $30,000 in back taxes and offer to settle your taxes with a payment plan over 12 months.
When you submit your OIC, you include your first payment and your $205 application fee, which in this example would be $2,500+$205=$2,705.
Your remaining balance ($27,500) over the next 11 months would be $2,500 per month.
Note: the first payment and the application fee are nonrefundable and do not guarantee that the IRS will accept your payment plan offer.
If the offer is accepted or denied, the IRS will still take your first payment and apply it to your outstanding balance.