Running a small business is often a rewarding experience, but tax season can inspire a wave of stress. If your business finds itself facing a hefty tax bill you can’t seem to manage, it can feel like the end of the road.
Thankfully, the IRS offers a program called “Offer in Compromise” (OIC) that might be a solution. Familiarizing yourself with what an OIC is and how it works can help you determine if it’s the right option for your small business.
What is an Offer in Compromise?
An OIC can allow you to settle your outstanding tax debt with the IRS for a lump sum payment that’s less than the total amount owed. This program is ideal for situations where paying the full amount would cause your business significant financial hardship. There are two main reasons the IRS might consider your OIC. The first is Doubt as to Liability, which applies if you have a legitimate dispute about the amount of tax owed or believe there’s an error in the IRS’s assessment.
The second reason is Doubt as to Collectability, which is more common and applies when you simply cannot pay the full amount owed, even if you agree with the assessment. The IRS considers your business’s financial health and future ability to pay when evaluating an OIC based on collectability.
Qualifying for an Offer in Compromise
Not every small business qualifies for an OIC; the IRS considers a business’ tax filing history before subsidizing its owed debt. All required tax returns for the past six years must be filed before submitting an OIC. For your business to qualify for an Offer in Compromise, it must also be current with federal tax deposits for the current quarter and the prior two quarters. Furthermore, the IRS will assess your business’s financial situation to determine if you can realistically afford to pay the proposed OIC amount.
If you believe an OIC might be a viable option, you should gather all your business’s financial documents. You’ll need detailed information about your business’s income, expenses and assets. Form 4338 and Collection Information Statement for Businesses are good starting points.
An OIC can be a valuable tool for small businesses facing overwhelming tax debt. However, it’s a complex process that must be navigated with care. Gathering the necessary documentation, carefully evaluating your situation and seeking legal counsel can help you navigate the OIC application process as efficiently and effectively as possible.