An Offer in Compromise (OIC) is a legal agreement between a taxpayer and the Internal Revenue Service (IRS) to settle tax debt for less than their full amount owed. This approach provides a potential lifeline for people in significant financial distress, allowing them to move on with their lives without the burden of overwhelming tax debt. Naturally, like any financial decision, it comes with its pros and cons. Let’s examine each of them in detail.
Pros of an Offer in Compromise
Reduction in the Amount Owed
The primary advantage is clear – you get to pay less than you owe. Depending on your financial situation and what the IRS considers ‘reasonable’ based on their analysis, an Offer in Compromise can heavily reduce your debt, sometimes by 50% or more.
Stops Collection Actions
Once you submit an OIC, the IRS stops all collection actions. This includes wage garnishments, liens, and levies. This can provide a substantial relief from the stress and anxiety caused by aggressive collection methods.
A Fresh Start
A successful OIC provides a fresh start financially, allowing you to plan your future without the burden of the IRS constantly looming in the back of your mind.
Cons of an Offer in Compromise
Not Guaranteed Approval
An OIC is not a guaranteed solution. The IRS is under no obligation to accept your offer, especially if they believe you can pay your liability in full.
Impact on Credit Score
The process can negatively affect your credit score. When the IRS files a tax lien against you, it appears on your credit report, and although settling your debt through an OIC eventually removes this, the lien can stay on your report for up to seven years.
Public Record
Your OIC becomes a matter of public record. Some people might not want their financial matters available to the general public.
Frequently Asked Questions
How long does the Offer in Compromise process take?
The process can take anywhere from 6 to 24 months, depending on the complexity of your case and how busy the IRS is at the time.
Can an Offer in Compromise be reversed?
Yes, the IRS can reverse an OIC if you do not meet the terms of the agreement, fail to pay your taxes in future years, or fail to disclose all your assets during the application process.
To conclude, carefully considering the pros and cons of using an Offer in Compromise to settle your tax debt is essential to making a sound decision. Always consult with a tax professional before choosing your path to ensure it aligns with your financial situation and future plans.
