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Discover How Offers in Compromise Can Transform Your Financial Future
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Article Highlights:About Offers in CompromiseApplication of Up-Front PaymentsApplication FeeLow-Income TaxpayersOIC ConceptsDoubt as to LiabilityDoubt as to CollectabilityPromotion of Effective Tax AdministrationOIC QualificationsPre-Qualifier TestSubmission ProceduresForms 433-A and 433-BBarriers to Offer ProcessabilityOffers Withdrawn or Determined Non-ProcessableRejected OffersAccepted OffersGuidelines for IRS Financial Analysis of a Taxpayer’s OfferAn Offer in Compromise (OIC) is a program offered by the Internal Revenue Service (IRS) that allows taxpayers to settle their tax debts for less than the full amount owed. This program is particularly beneficial for financially distressed taxpayers who are unable to pay their tax liabilities in full. However, the IRS will not accept an offer if the taxpayer can pay their tax debt in full over time through an installment agreement. The OIC program has undergone several changes over the years, most notably as the result of the IRS's former "Fresh Start" initiative, which made the terms more flexible and accessible. This article delves into the various aspects of the OIC program, including application fees, up-front payments, low-income taxpayer offers, lump-sum offers, periodic payment offers, and the different concepts and qualifications involved.Application of Up-Front Payments - When submitting an OIC, taxpayers are required to make a non-refundable, up-front payment. This payment is necessary while the IRS considers the merits of the offer. However, the initial payment and monthly payments are not required for individuals meeting Low Income Certification guidelines. According to the instructions in the OIC booklet, Form 656-B (April 2024), the payment options are:Lump-Sum Offers: A lump-sum offer requires the taxpayer to pay 20% of the offer amount upfront, with the remaining balance to be paid in five or fewer installments within five months of the offer's acceptance. This type of offer is suitable for taxpayers who can gather a significant portion of the settlement amount quickly.Periodic Payment Offers: Periodic payment offers allow taxpayers to spread out their payments over a longer period, ranging from 6 to 24 months. The first payment must be made with the offer, and subsequent payments must follow the proposed terms. This option is ideal for taxpayers who cannot afford a lump-sum payment but can manage smaller, periodic payments.These up-front payments are considered payments of tax and are not refundable. If the offer is rejected, the up-front payments will be applied to the taxpayer’s liability.Application Fee - Submitting an OIC requires a $205 application fee. However, there is an exception:Low-Income Taxpayers: If the applicant is an individual or is operating as a sole proprietorship and their household gross income meets the low-income guidelines, the application fee is waived. For the most recent year, a low-income taxpayer was an individual with an Adjusted Gross Income (AGI) that doesn’t exceed 250% of the applicable poverty level. This provision is built into the Low-Income Certification chart in Form 656.OIC Concepts – An offer is predicated on one of three concepts:Doubt as to Liability - This concept applies when there is a genuine dispute about the existence or amount of the tax debt. Taxpayers who believe they do not owe the tax or that the amount is incorrect can submit an OIC based on doubt as to liability. Form 656-L is used for this purpose, and it must include a detailed description of why the taxpayer believes the liability is incorrect.Doubt as to Collectability - This concept applies when the taxpayer’s assets and income are insufficient to pay the full tax liability. The IRS evaluates the taxpayer’s reasonable collection potential, considering their income, assets, and allowable living expenses. If the IRS determines that the taxpayer cannot pay the full amount, they may accept an offer based on doubt as to collectability.Promotion of Effective Tax Administration - This concept applies when collecting the full tax liability would create economic hardship or would be unfair and inequitable. Even if the taxpayer can pay the full amount, the IRS may accept an offer if it promotes effective tax administration. This category is less common and requires a compelling reason for acceptance.
OIC Qualifications - To qualify for an OIC, taxpayers must meet certain criteria:All required tax returns must be filed.All required estimated tax payments for the current year must be made.The taxpayer must not be in an open bankruptcy proceeding.The taxpayer must use the most recent version of Form 656 and provide all necessary documentation.Pre-Qualifier Test - The IRS encourages taxpayers to use the Offer in Compromise Pre-Qualifier tool available on their website. This tool helps taxpayers determine their eligibility for an OIC and prepares a preliminary proposal. It is a useful resource for taxpayers to assess their chances of acceptance before submitting an offer.Submission Procedures - The procedures for submitting an OIC are outlined in Rev. Proc. 2003-71. Taxpayers must submit Form 656, along with Form 433-A (for individuals) or Form 433-B (for businesses), and any other required documentation. The information provided must be current, reflecting the taxpayer’s financial situation for the three months preceding the offer submission.Forms 433-A and 433-B - Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, and Form 433-B, Collection Information Statement for Businesses, are essential components of the OIC application. These forms require detailed information about the taxpayer’s income, expenses, assets, and liabilities. They must be filled out completely, with items that don’t apply notated as N/A (not applicable).Barriers to Offer Processability - Several factors can render an OIC non-processable:Incomplete forms or missing documentation.Failure to pay the application fee (unless waived).Failure to make the required up-front payment (unless waived).Not filing all required tax returns.Not making all required estimated tax payments for the current year.Offers Withdrawn or Determined Non-Processable - Taxpayers can withdraw an OIC at any time before its acceptance. The withdrawal request can be made in person, by mail, fax, or telephone. Once an offer is withdrawn, IRS collection activities can proceed. If an offer is determined to be non-processable, the IRS will return the application fee but apply any initial payment to the outstanding tax debt.Rejected Offers - An OIC is not considered rejected until the IRS issues written notice of the rejection. The taxpayer has the right to request a meeting to discuss alternative solutions. If no agreement is reached, the taxpayer has 30 days to file a protest with appeals. The IRS will notify the taxpayer by mail, providing the reason for the rejection. The application fee is not refunded, but the taxpayer can submit another offer with a new application fee.Accepted Offers - If the IRS accepts the taxpayer’s offer, they send written notice by mail. The taxpayer must comply with the offer terms and make prompt payments to prevent default. Once the payment terms are met, the IRS will release all Notices of Federal Tax Lien against the taxpayer. Accepted offers become public information, and if the offer involves more than $50,000, a written opinion from the IRS Chief Counsel is required.Guidelines for IRS Financial Analysis of a Taxpayer’s Offer - The IRS uses allowable living expense standards to evaluate a taxpayer’s ability to pay. These standards, which are revised periodically, incorporate average expenditures for the basic necessities for people in similar geographic areas. The IRS considers three standards for determining necessary expenses based on a taxpayer’s income level:National Standards: Cover food, clothing, and other items.Local Standards: Cover housing and utilities, and transportationOther Necessary Expenses: Include health care, taxes, and court-ordered payments.The Offer in Compromise program is a valuable tool for taxpayers struggling with tax debt. The initiative has made it easier for more taxpayers to qualify for an OIC, providing a pathway to financial relief.However, applying for an OIC can be complex and is generally best handled by a tax professional. Contact this office for assistance.
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Tax and Financial Insights
by NR CPAs & Business Advisors
2026 IRS Mileage Rates: Key Updates and Insights
The IRS has rolled out the inflation-adjusted mileage rates for 2026, offering taxpayers an efficient way to claim deductions for vehicle-related expenses incurred for business, charity, medical, or moving purposes. These adjustments reflect the continued economic shifts impacting car operation costs.
Effective January 1, 2026, the new standard mileage rates are established as follows:
- Business Travel: Increased to 72.5 cents per mile, inclusive of a 35-cent-per-mile depreciation allocation. This marks a rise from the 70 cents per mile rate set for 2025
- Medical/Moving Purposes: Reduced slightly to 20.5 cents per mile, down from 21 cents in the previous year, reflecting the variable cost considerations.
- Charitable Contributions: Consistent at 14 cents per mile, a fixed rate unchanged for over a quarter-century.
As is typical, the business mileage rate considers the integral fixed and variable costs of automobile operation. Meanwhile, the medical and moving rates remain contingent on variable expenses as determined by the IRS study.
It is critical to note that the One Big Beautiful Bill Act (OBBBA) held firm on disallowing moving expense deductions except for specific cases within the Armed Forces and intelligence community, marking a substantial shift since 2017.
When engaging in charitable work, taxpayers might opt for a direct expense deduction over the per-mile method, covering gas and oil costs. However, comprehensive upkeep and insurance costs are non-deductible expenses.
Business Vehicle Use Considerations: Taxpayers can alternatively compute vehicle expenses using actual costs, which might benefit from shifting depreciation rules, particularly through bonuses and first-year advantages. Keep in mind, however, reverting from actual cost calculations to standard rates in subsequent years is restricted, particularly per vehicle protocol and when exceeding four vehicles in concurrent use.
Additionally, parking, tolls, and property taxes attributable to business can be deducted independently of the general rate, an often-overlooked advantage by many business owners.
Tax Strategies for Employers and Employees: Reimbursements based on the standard mileage framework, providing the right documentation is in place, remain tax-free for employees. Meanwhile, the elimination and continued prohibition of unreimbursed employee deductions continue, with particular exceptions offered to qualified personnel across specific occupations.
Opportunities for Self-employed Individuals: Entrepreneurs remain eligible for deductions on business-related vehicle use via Schedule C, with potential to account for business-use interest on auto loans.
Heavy SUVs and Deduction Advantages: Heavier vehicles exceeding 6,000 pounds but under 14,000 pounds open opportunities for substantial tax deductions through Section 179 and bonus depreciation avenues. The lifecycle of such a vehicle bears implications on recapturing initially claimed deductions, urging cautious tax planning.
For professional guidance on optimizing your vehicle-related tax deductions and understanding their implications on tax strategies, contact our office in Coral Gables, Florida, where expert advice and strategic insights are just a call away.
Educator's Deduction Reform: Key Changes Under OBBBA
The One Big Beautiful Bill Act (OBBBA) introduces significant enhancements for educators' tax deductions starting in 2026, offering both strategic opportunities and planning considerations for educators who qualify. With the reinstated itemized deduction for qualified unreimbursed expenses, educators have a broader spectrum of financial relief. This is complemented by the retention of the $350 above-the-line deduction, allowing educators to maximize their tax benefits by selectively allocating expenses between these avenues.
Understanding the nuances of these changes is crucial for educators and financial advisors alike. The dual-option deduction strategy can potentially enhance tax efficiency, thereby aligning with broader financial planning goals.
At NR CPAs & Business Advisors, based in Coral Gables, Florida, our expertise in tax preparation and planning provides invaluable support to educators navigating these changes. Our comprehensive approach, combined with personalized advice from our experienced team, ensures compliance and optimization in line with the latest tax legislations.
Given these updates, it is imperative to engage with seasoned professionals to fully leverage your deduction strategies. Contact us today to streamline your tax planning under OBBBA's new guidelines and maximize your deductions for upcoming tax years.
