Tax Updates

Issue Number: Tax Tip 2024-37

Taxpayers could settle federal tax debt with an Offer in Compromise

When a taxpayer can’t pay their full tax debt or if paying would cause financial hardship, they should consider applying for an Offer in Compromise. For assistance filing for an OIC from a legitimate representative, taxpayers are encouraged to check for a licensed enrolled agent or a reputable accountant in their area.

How an Offer in Compromise works
This is an agreement between a taxpayer and the IRS that settles a tax debt for less than the full amount owed.

The goal is a compromise that’s in the best interest of both the taxpayer and the agency. The Offer in Compromise application includes a fee of $205 and an initial payment. Low-income taxpayers don’t have to pay either the fee or the initial payment. Taxpayers should review the instructions for Form 656-B, Offer in Compromise, to see if they meet the qualifications to have these initial costs waved.

Who’s eligible
Taxpayers can check their eligibility and prepare a preliminary proposal with the Offer in Compromise Pre-Qualifier Tool.

Review the Offer in Compromise booklet
Eligible taxpayers should download and review the latest version of the OIC booklet., to avoid processing delays. This booklet covers everything a taxpayer needs to know about submitting an Offer in Compromise including:

Eligibility.
Costs to apply.
Application process.
Forms.
Application evaluation
When reviewing applications, the IRS considers the taxpayer’s unique set of facts and special circumstances affecting their ability to pay, including their:

Income.
Expenses.
Asset equity.
Beware of Offer in Compromise mills
Offer in Compromise mills aggressively promote Offers in Compromise in misleading ways to people who clearly don’t meet the qualifications, often costing taxpayers thousands of dollars.

An Offer in Compromise mill usually makes outlandish claims about how they can settle a person’s tax debt for cheap. The promoter fees are often excessive, and eligible taxpayers pay the OIC mill to get the same deal they could have received on their own by working directly with the IRS. This takes unnecessary money out of the taxpayer’s wallet.

In addition, not every taxpayer will qualify for an OIC. Some promoters knowingly advise indebted taxpayers to file an OIC application even though the promoters know the person will not qualify, costing honest taxpayers money and time.

More information:

Choosing a Tax Professional
Directory of Federal Tax Return Preparers with Credentials and Select Qualifications

An offer in compromise allows you to settle your tax debt for less than the full amount you owe. It may be a legitimate option if you can’t pay your full tax liability or doing so creates a financial hardship. We consider your unique set of facts and circumstances:

Ability to pay
Income
Expenses
Asset equity

We generally approve an offer in compromise when the amount you offer represents the most we can expect to collect within a reasonable period of time. Explore all other payment options before you submit an offer in compromise. The Offer in Compromise program is not for everyone. Be sure to check the qualifications of any tax professional you hire to help you file an offer.

Who Is Eligible
Confirm you’re eligible and prepare a preliminary proposal with the Offer in Compromise Pre-Qualifier Tool.

You’re eligible to apply for an Offer in Compromise if you:

Filed all required tax returns and made all required estimated payments
Aren’t in an open bankruptcy proceeding
Have a valid extension for a current year return (if applying for the current year)
Are an employer and made tax deposits for the current and past 2 quarters before you apply

If You Apply and Are Not Eligible
If you apply for an Offer in Compromise and we can’t process your offer, we’ll:

Return your application and offer application fee
Apply any offer payment you included to your balance due

Submit Your Application
Find forms to submit an application and step-by-step instructions in Form 656-B, Offer in Compromise BookletPDF.

Complete an application package:

Form 433-A (OIC) (individuals) or 433-B (OIC) (businesses) and all required documentation as specified on the forms
Form 656(s) – you must submit individual and business tax debt (Corporation/ LLC/ Partnership) on separate Forms 656
$205 application fee (non-refundable)
Initial payment (non-refundable) for each Form 656.

Select a Payment Option
Your initial payment varies based on your offer and the payment option you choose:

Lump Sum: Submit an initial payment of 20% of the total offer amount with your application. If we accept your offer, you’ll receive written confirmation. You must pay any remaining balance due on the offer in five or fewer payments.
Periodic Payment: Submit your initial payment with your application. Continue to pay the remaining balance in monthly installments while the IRS considers your offer. If IRS accepts your offer, continue to pay monthly until it is paid in full.

If You Meet the Low Income Certification Guidelines
You don’t have to:

Send the application fee or the initial payment
Make monthly installments while we review your offer.

For details, see Form 656-B, Offer in Compromise BookletPDF.

Understand the Process
While IRS evaluates your offer:

Your non-refundable payments and fees are applied to the tax liability (you may designate payments to a specific tax year and tax debt)
IRS may file a Notice of Federal Tax Lien
IRS suspends other collection activities
Your legal assessment and collection period is extended
You make all required payments per your offer
You don’t have to make payments on an existing installment agreement
Your offer is automatically accepted if the IRS doesn’t make a determination within two years of the IRS receipt date (This does not include any Appeal period.)

If Your Offer Is Accepted

You must meet all the Offer Terms listed in Section 7 of Form 656, including filing all required tax returns and making all payments
IRS doesn’t release federal tax liens until your offer terms are satisfied
Certain offer information is available for public review by requesting a copy of a public inspection file.

If Your Offer Is Rejected

You may appeal a rejection within 30 days using Request for Appeal of Offer in Compromise, Form 13711PDF.
The IRS Independent Office of Appeals offers additional assistance on appealing your rejected offer.

It’s important for taxpayers to have all their documents and information so they can file an accurate and complete tax return. This may mean waiting to file until they receive all their documentation – and it can also mean following up on missing or incorrect documents.

Most taxpayers should have received income documents near the end of January. These may include:

• Form W-2, Wage and Tax Statement
• Form 1099-MISC, Miscellaneous Income
• Form 1099-INT, Interest Income
• Form 1099-NEC, Nonemployee Compensation
• Form 1099-G, Certain Government Payments; like unemployment compensation or state tax refund

Taxpayers should first contact the employer, payer or issuing agency directly for copies

Taxpayers who haven’t received a W-2 or Form 1099 should contact the employer, payer or issuing agency and request a copy of the missing document or a corrected document.

If they can’t get a copy, they can contact the IRS for help

Taxpayers should file their tax return on time – this year’s tax deadline is April 18 for most filers – even if they still have missing or incorrect documents. If they don’t receive the missing or corrected form from their employer or payer by the end of February, they may call the IRS at 800-829-1040 for help. They’ll need to provide their name, address, phone number, Social Security number and dates of employment. They’ll also need to provide the employer’s or payer’s name, address and phone number. The IRS will contact the employer or payer and request the missing form.

Estimating income when forms are incorrect or missing

After the taxpayer contacts the IRS about missing documents, the IRS will send the taxpayer one of these forms:

Form 4852, Substitute for Form W-2, Wage and Tax Statement or Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, Etc.

If the taxpayer doesn’t receive the missing form in time to file their income tax return by the filing due date, they may complete Form 4852 or Form 1099-R to estimate their wages and earnings. They then attach the relevant form to their tax return when they file.

Taxpayers may need to file an amended return if they filed with missing or incorrect info

If they receive the missing or corrected Form W-2 or Form 1099-R after filing their return and the information differs from their previous estimate, they must file Form 1040-X, Amended U.S. Individual Income Tax Return.

Incorrect Form 1099-G for unemployment benefits

Taxpayers who receive an incorrect Form 1099-G for unemployment benefits they did not receive should contact the issuing state agency to request a revised Form 1099-G showing they did not receive these benefits. Taxpayers who are unable to obtain a timely, corrected form from the state should still file an accurate tax return, reporting only the income they received.

The EITC helps workers who earned $59,187 or less when they file their tax return. Unfortunately, many people risk missing out on the credit because they don’t know they’re eligible — especially people who had a major life change and may qualify for the first time this year.

Other workers at risk for overlooking the EITC include those:

• Living in non-traditional homes, such as a grandparent raising a grandchild.
• Whose earnings declined or whose marital or parental status changed.
• Without children.
• With limited English skills.
• Who are veterans.
• Living in rural areas.
• Who are Native Americans.
• With earnings below the filing requirement.

Taxpayers can check their eligibility and how much they qualify for at IRS.gov/eitc.

The EITC is a tax credit for certain people who work and have low to moderate income. A tax credit usually reduces tax owed and may also result in a refund.

How to claim the EITC

To get the EITC, qualified workers must file a tax return and claim the credit. Eligible taxpayers should file a tax return to claim the credit even if their earnings were below the income requirement to file.

Free tax preparation help is available online and through volunteer organizations:

• IRS Free File at IRS.gov/freefile.
• Free in-person tax prep help.
• A trusted tax professional.

Most EITC refunds deposited by late February

Although the IRS began accepting 2022 returns on Jan. 23, 2023, the IRS can’t issue a refund that includes the EITC before mid-February. This is due to the 2015 PATH Act, which provides this additional time to safeguard against fraudulent refunds.

The Where’s My Refund? tool should show refund status by Feb. 18 for most early EITC filers. Most EITC -related refunds should be available in bank accounts or on debit cards by Feb. 28 if the taxpayer chose direct deposit and there are no other issues with their tax return.

More information:

• EITC Central information site
• Publication 596, Earned Income Credit
• Tax Professionals
• IRS issues guidance on state tax payments to help taxpayers

Receiving a tax refund is happy news to any taxpayer; getting it quickly is even better. Direct deposit is the safest and most convenient way to receive a tax refund. The IRS encourages taxpayers to file when they are ready and choose direct deposit to receive any refund they may be owed.

Benefits of choosing IRS direct deposit:

• It’s fast. The fastest way for taxpayers to get their refund is to file electronically and choose direct deposit. Visit IRS.gov for details about IRS Free File, Free File Fillable Forms, free tax return preparation and more. Taxpayers who file a paper return can also choose direct deposit, but it will take longer to process the return and get a refund.
• It’s secure. Since refunds are electronically deposited, there’s no risk of having a paper check stolen or lost in the mail.
• It’s easy. Taxpayers can simply follow the instructions when selecting direct deposit as a refund method and enter their account information as directed. They must enter the correct account and routing numbers when they file.
• It provides options. Taxpayers can split a refund into several financial accounts. These include checking, savings, health, education and certain retirement accounts. They should use IRS Form 8888, Allocation of Refund, Including Savings Bond Purchases to deposit a refund in up to three accounts. This form cannot be used to designate part of a refund to pay tax preparers.

Taxpayers should deposit refunds into U.S. bank accounts in their own name, their spouse’s name or both. They should avoid making a deposit into accounts owned by others. Some banks require both spouses’ names on the account to deposit a tax refund from a joint return. Taxpayers should check with their bank for direct deposit rules.

Get a bank account
Taxpayers who don’t have a bank account can visit the FDIC website for information on banks that let them open an account online and how to choose the right account. Veterans can use the Veterans Benefits Banking Program for access to financial services at participating banks.

Mobile apps may be an option
Some mobile apps and prepaid debit cards allow for direct deposit of tax refunds. They must have routing and account numbers associated with them that can be entered on a tax return. Taxpayers should check with the mobile app provider or financial institution to confirm which numbers to use.

Taxpayers must have their routing and account numbers for direct deposit available when they are ready to file. The IRS can’t accept this information after a return is filed.

There is a limit of three direct deposit refunds made into a single financial account or prepaid debit card.

More information:
Publication 17, Your Federal Income Tax (for Individuals)

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