When it comes to Offer in Compromise vs. Installment Agreement, the key difference lies in how much a taxpayer pays. An OIC allows individuals to pay less than the tax debt owed, while an Installment Agreement provides taxpayers more time to satisfy their debts. So, what other differences are there? And in what kinds of situations does each option become more suitable? Find out all about it by reading our article below.
What Is the Difference Between an Offer in Compromise and an Installment Agreement?
An Offer in Compromise provides the opportunity to pay off debt less than what is owed. An Installment Agreement (IA) still requires individuals to pay the total debt plus interest, but allows payment to be made over time. Moreover, an Offer in Compromise generally has stricter requirements and a more complex review process than an IA.
What Is an Offer in Compromise?
Offer in Compromise Definition
An Offer in Compromise (OIC) is a tax relief option in which there’s an agreement for taxpayers to pay less than the full amount owed. An OIC is designed to help those experiencing financial hardship who cannot realistically pay the full debt.
Who May Qualify for an Offer in Compromise?
Taxpayers who can demonstrate severe financial difficulties and that paying the full debt would further worsen their condition are generally suitable for an OIC. Moreover, taxpayers must have filed all required tax returns, made all current required estimated tax payments, and not be in bankruptcy proceedings.
What the IRS Looks At
When determining an OIC approval, the IRS looks at your assets, current and future income, and necessary living expenses. Next, using Reasonable Collection Potential (RCP), a mathematical method for calculating your ability to pay, they determine the absolute minimum amount they will accept to settle your debt.
Pros of an Offer in Compromise
The benefits of an OIC are:
- paying less debt
- stops aggressive collection actions, such as levy, while the application is under review.
- If applications are approved and terms are satisfied, all federal tax liens are discharged, along with any remaining interest and penalties.
Cons of an Offer in Compromise
Some drawbacks of an OIC include:
- a low approval rate.
- a loss of future tax refund, in which the IRS will keep any tax refunds you are owed for the calendar year.
- strict 5-year rule, where individuals must file and pay taxes for the next 5 years.
- The standard 10-year collection statute of limitations is tolled while the application is under review, giving the tax authority molere time to collect if the application is rejected.
What Happens If the IRS Rejects an Offer in Compromise?
If your application is rejected, you have the opportunity to appeal (by filing Form 13711) within 30 days of the rejection date. During this 30-day timeframe, collection action will remain halted until a decision is made.
What Is an Installment Agreement?
Installment Agreement Definition
An Installment Agreement is an IRS payment plan that allows taxpayers to pay tax debts over time rather than in full at once. An IA is designed to help individuals and businesses to manage tax debts more efficiently and ease the financial burden.
Who May Qualify for an IRS Installment Agreement?
An IA may be available to taxpayers who owe federal tax debt and can’t pay the full amount. Different types of payment plans are available, with different eligibility based on the amount owed, filing status, and ability to pay.
Types of IRS Payment Plans to Mention
There are different types of payment plans, designed for individuals and businesses in different circumstances: short-term payment plan, Long-term installment agreement, Streamlined installment agreement, Partial payment installment agreement, and Business installment agreement.
Pros of an Installment Agreement
- If you owe less than $50,000 in debt, qualifications are easier, without the need for a detailed financial statement.
- Once approved, collection actions may be halted.
- Installment Agreement terms are flexible, offering different payment timelines to pay down the balance.
Cons of an Installment Agreement
- Interests and penalties continue to accrue throughout the term of the agreement.
- Unlike with an OIC, taxpayers must pay the full tax debt.
- The IRS will collect tax refunds until the full debt has been paid.
Offer in Compromise vs. Installment Agreement: Side-by-Side Comparison
Best Use Case
Opting between the two relief options comes down to the ability to pay off debt. If an individual is experiencing financial distress and paying the full debt is impossible, the Offer in Compromise is the better option. On the other hand, an IA is best suited for those who have the capacity to pay but need more time to satisfy the debt.
Amount Paid
An Offer in Compromise provides taxpayers the opportunity to pay less than what is owed, whereas an Installment Agreement still requires payment of the full amount.
IRS Approval Difficulty
With less strict requirements, the Installment Agreement has a much easier approval process than an OIC. An Offer in Compromise requires an extensive process, which can take time and more effort.
Documentation Required
An OIC has stricter documentation requirements than an IA. However, some types of Installment Agreements, such as those involving large debts, may require additional documents for approval.
Timeline
The process of an installment agreement can be immediate or up to weeks, whereas an OIC requires a longer timeline of 7 to 12 months due to a more extensive review process.
Collection Risk
Both options stop collection actions. Once approved, an installment agreement eliminates all collection risk while compliant, and an OIC halts any actions beginning with the review.
Long-Term Impact
If approved, an Offer in Compromise eliminates all debt but requires a 5-year clean record going forward. Debts under an Installment Agreement must be paid in full, and interest continues to accrue throughout the term.
How a Tax Attorney Can Help You Choose the Right IRS Tax Relief Option
Deciding between an Offer in Compromise vs. Installment Agreement should be taken seriously with research and analysis as a part of the decision-making process. You may select the wrong plan without knowing your situation and financial capacity, which may create more complex problems than the ones you had at the beginning. A tax attorney can help you from beginning to end to ensure all your paperwork is in order and filed, all requirements are met, so you can make a more informed decision about the best payment option.
Frequently Asked Questions About Offer in Compromise vs. Installment Agreement
Is an Offer in Compromise Better Than an Installment Agreement?
There is no better option. Suitability depends on your specific tax situation and needs.
Does an Installment Agreement Reduce My Tax Debt?
An installment agreement does not reduce your tax debt. 100% of the principal must be paid.
Can I Apply for an Offer in Compromise If I Already Have an Installment Agreement?
Yes. You can still apply for an OIC even if you already have an Installment Agreement.
Final Thoughts
When it comes to tax issues, time is of the essence. You want them dealt with immediately to prevent escalation, achieve resolution, and restore peace of mind. Greenberg Law Group, P.A., has extensive experience handling various tax matters and a proven track record. Contact Greenberg Law Group today to start dealing with your tax issues correctly and effectively.