Can a Business Owner Get an IRS Offer in Compromise?
Does your business owe back taxes to the IRS? If so, you may feel like there’s no realistic way to catch up, especially if the balance has grown due to penalties and interest. In some situations, the IRS may allow businesses or business owners to settle their tax debt for less than the full amount through a program called an Offer in Compromise (OIC). Although not every business will qualify, this option can provide a path to resolving tax debt and avoiding aggressive collection actions if the IRS determines the balance cannot reasonably be paid in full.
Key Takeaways
Businesses may qualify for an Offer in Compromise if the IRS determines the full tax debt cannot realistically be collected. The IRS evaluates income, assets, and expenses to determine a reasonable settlement amount.
Before applying, businesses must be fully compliant with current tax obligations. This includes filing all required tax returns, making estimated payments, and submitting required payroll tax deposits.
The offer amount is based on the business’s ability to pay. The IRS uses financial information from Form 433-A (sole proprietors) or Form 433-B (other businesses) to calculate income, asset equity, and future payment potential.
What is an Offer in Compromise?
An Offer in Compromise (OIC) is essentially an agreement with the IRS that allows taxpayers (including certain businesses) to settle their tax debt for less than the balance due. This agreement not only helps them resolve their tax debt, but also avoid collection actions, such as garnishment and tax levies.
The IRS will generally consider an OIC offer if it feels there is no reasonable expectation of collecting the tax debt in full.
Types of OICs
There are two types of OICs available: lump sum cash offer and periodic payment offer.
The lump sum offer requires you to make an initial payment equal to 20% of the full offer and payment of the remaining balance within five (5) months.
For those who choose the periodic payment option, you can pay the balance over 6 to 24 months. You must include an initial payment equal to one of the monthly payments when submitting your OIC.
Business OIC Eligibility Criteria
Before a business owner submits an OIC application, they must make sure they meet the eligibility requirements.
To be considered, you must:
- File all required tax returns, including any that may be past due.
- Make all estimated tax payments for the current year.
- Submit all required federal tax deposits (payroll taxes) for the current quarter, as well as the two (2) preceding quarters.
- Have a notice/bill for at least one of the tax debts included in the offer.
Additionally, you cannot be in an open bankruptcy proceeding or an open audit.
How to Apply For a Business Offer in Compromise
To apply for a business Offer in Compromise, you will need to submit the following:
- Form 656, Offer in Compromise.
- Form 433-B (OIC), Collection Information Statement for Businesses
- Application fee of $205
- Initial offer payment (20% of the total offer amount or first month’s payment, depending on OIC offer type)
If you are a sole proprietor, you’ll need to complete Form 433-A (OIC) instead of 433-B.
You can find all of the necessary forms and instructions for completing them in Form 656-B. Be sure all are filled out completely and signed, and any supporting documentation is included. Make a copy of the entire packet and keep it for your records.
How to Calculate Your Offer Amount
To determine your offer amount, you’ll use Form 433-A (sole proprietor) or 433-B (all other businesses), which calculates your income and assets, as well as expenses and debts.
Lump Sum Offers
For lump sum offers, you’ll multiply your remaining monthly income (Box F for 433-A or Box for 433-B) by 12 to determine your future remaining income. If you’re using 433-B, you’ll add this number to available equity in assets (Box A) to determine your offer amount. For 433-A, you’ll add the amounts from Box A and B to your future remaining income to get your figure.
For example, if you are a sole proprietor with $5,000 in individual assets (Box A), $15,000 in business assets (Box B), and future remaining income estimated at $10,800 ($900 x 12), your offer total would be $30,800. You would need to include a payment of at least $6,160 (20%) with your application, as well as the $205 processing fee. The remaining balance must be paid within five (5) months.
Periodic Payment Offers
For periodic payment offers, you’ll multiply your remaining monthly income (Box F for 433-A or Box for 433-B) by 24 to determine your future remaining income. If you’re using 433-B, you’ll add this number to available equity in assets (Box A) to determine your offer amount. For 433-A, you’ll add the amounts from Box A and B to your future remaining income to get your figure.
Using the same example for the lump sum above, the total offer amount would be $41,600.
$5,000 (Box A) + $15,000 (Box B) + $21,600 ($900 x24) = $41,6000
In this case, you would submit an initial payment of $1,733 ($41,600/24) and make 23 additional payments at that amount (or larger if you want to pay it off sooner).
Generally, the IRS will not consider an OIC if you can pay your tax debt in full through an installment agreement. If you have available equity in assets to cover your total tax debt, it will likely be denied, as well.
Tax Debt Not Eligible For an OIC
It’s important to note that if you owe trust fund taxes (Social Security and Medicare), you can only claim the employer portion of the taxes in your offer. The IRS will not accept an OIC for any money withheld from an employee’s wages that were not paid as required. You will still be responsible for paying those taxes in full.
Business OIC FAQs
Final Thoughts
An Offer in Compromise can be a valuable option for business owners facing significant tax debt, but the application process can be complex and requires detailed financial disclosure. Because the IRS carefully reviews each submission and may deny offers if it believes the debt can be paid through other means, it’s important to ensure the application is accurate and well-prepared. If your business is struggling with tax debt, understanding how the OIC program works can help you determine whether it may be a realistic path toward resolving your IRS balance.