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Does An Offer In Compromise Affect Your Credit?

Tax written on a table with a calculator

Every year, about one in four Americans owe federal income taxes. For many, the debt feels unmanageable, and they worry about how they will pay it off. Thankfully, the IRS has programs to help people manage their tax debts. One option is an IRS Offer in Compromise (OIC). In this article, we will explain what an OIC is, how to qualify, how to apply, and its effects on your life.

Laptop and tax forms with the text 'Offer in Compromise' displayed.

Understanding an IRS Offer in Compromise

An IRS Offer in Compromise is a deal between a taxpayer and the IRS to settle tax debt for less than the full amount owed. This can be a great option for those who cannot pay their full tax bill or would face financial hardship by doing so. However, not everyone qualifies for an OIC. The IRS considers several factors to determine eligibility:

  • Ability to pay: This refers to your capacity to pay off the tax debt based on your current financial situation. The IRS looks at your overall financial health to decide if you can pay the full amount.
  • Income: Your current and projected income are evaluated to understand your ability to pay the tax debt over time.
  • Expenses: The IRS considers your necessary living expenses to see what portion of your income is available to pay the tax debt.
  • Asset equity: This includes the value of your properties, vehicles, and other assets that could be used to pay the tax debt.

The IRS evaluates each offer to ensure it is the most they can expect to collect within a certain period. It’s wise to explore other payment options before applying for an OIC. The IRS provides a tool to help you see if you might qualify, considering your tax filing status, demographic, and financial information. Despite this, most OIC applications are denied due to the applicant’s financial information and ability to pay. In 2017, over 16 million individuals and 3 million businesses owed taxes, but only about 25,000 managed to settle through an OIC.

Steps to Take If You Qualify for an Offer in Compromise

If you qualify for an OIC, you’ll need to submit a form for IRS review. You should complete all documents in the Form 656-B Booklet and seek advice from a tax expert. This booklet includes:

  • Form 433-A (OIC) for individuals or Form 433-B (OIC) for businesses, with required documentation
  • Form 656 for individual and business tax debts (separate forms for each)
  • A $186 non-refundable application fee
  • An initial non-refundable payment for each Form 656

You must choose an initial payment option:

  1. Lump Sum Cash: Pay 20% of the total offer amount with your application. If accepted, pay the remaining balance in five or fewer payments.
  2. Periodic Payment: Pay the initial amount with your application, then make monthly payments while the IRS reviews your offer. Continue monthly payments until the debt is paid, usually within six to 24 months.

Your initial payment must be at least the value of your assets plus your anticipated future income minus living expenses. The calculations can be complex, so consider getting help from a tax expert.

Important Considerations During IRS Review

While the IRS reviews your OIC, remember these key points:

  • Payments and fees are non-refundable and applied to your tax debt.
  • A Notice of Federal Tax Lien may be filed. This means the IRS can claim your property if you fail to pay the tax debt.
  • Other collection activities will be paused. The IRS won’t pursue other methods to collect the debt while your OIC is under review.
  • Your assessment and collection period will be extended. The IRS extends the time they have to collect the tax debt while considering your OIC.
  • You must make all required payments. Ensure you keep up with the payments agreed upon in your OIC.
  • Existing installment agreement payments are not required. You don’t have to continue payments under any existing agreements while your OIC is reviewed.
  • The IRS may review your finances for up to two years. They can look into your financial situation for up to two years during the OIC process.
  • If the IRS doesn’t decide within two years, your OIC is automatically accepted. This rule protects you from indefinite waiting.
  • You must not owe any tax liability for five years after your OIC. Stay compliant with your tax obligations for five years post-OIC to avoid default.
  • You can appeal the IRS decision. If denied, you have the right to appeal the decision.

Steps to Take If You Don’t Qualify for an Offer in Compromise

If your OIC is denied, it’s not the end. You can appeal the decision within 30 days by submitting a Request for Appeal of Offer in Compromise. Also, consult a tax specialist for guidance on your next steps. They can help you explore other IRS programs or payment plans to manage your tax debt.

Woman checking her phone with numerous documents spread out on her table

Will an Offer in Compromise Affect My Credit Score?

The IRS may review your credit history as part of evaluating your OIC, but your credit score will not be affected by submitting an OIC application. Credit agencies typically won’t know that you applied for an OIC, so your credit score should remain unaffected. Your credit history is separate from the IRS’s assessment of your tax situation.

Conclusion

An IRS Offer in Compromise can provide significant relief if you owe more taxes than you can pay. While it doesn’t impact your credit score, it involves a thorough application process and consideration of your financial situation. If you qualify, follow the steps carefully and consult a tax expert. If you don’t qualify, explore other options and seek professional advice. Managing tax debt can be challenging, but knowing your options helps you make informed decisions.

For further assistance and professional guidance, contact Austin & Larson. We offer expert advice and support to help you navigate your tax situation effectively.

FAQs

Can an Offer in Compromise impact my credit score? 

No, an Offer in Compromise does not impact your credit score. The IRS evaluates your financial situation, but this process is not reported to credit agencies.

Will the IRS know about my credit history when I apply for an OIC? 

Yes, the IRS may review your credit history as part of the evaluation process for an Offer in Compromise. However, this review does not affect your credit score.

Do credit agencies know if I submit an Offer in Compromise? 

No, credit agencies typically do not receive information about your Offer in Compromise submission. Your credit score remains unaffected.

Is my credit score considered in the OIC application process? 

The IRS may look at your credit history, but your credit score itself is not a factor in the OIC decision. The focus is on your ability to pay the tax debt.

Will my credit score improve if my OIC is accepted? 

Your credit score does not change due to the acceptance of an OIC. The Offer in Compromise is a tax matter, not a credit matter.