They are not in open bankruptcy proceedings. Have a valid extension for a current year return (if requested for the current year) The question as to liability occurs when there is a genuine dispute over the existence or amount of the correct tax debt under the law. If you have legitimate doubts that you owe part or all of the tax debt, you will need to complete a PDF of Form 656-L, Commitment Offer (Liability Question). A commitment offer (OIC) is a payment plan that you can negotiate with the IRS to reduce your tax debt.
With an OIC, you propose to pay a smaller amount to the IRS, depending on your ability to pay. This is a good strategy, but keep in mind that it's not an easy or comfortable process. The IRS has the authority to cancel all or part of your tax debt and to settle with you for less than you owe. This is called a commitment offer or OIC.
The Offer in Compromise (OIC) program allows you to offer a smaller amount for the payment of an undisputed tax obligation. Estimated tax payments must be equal to 100 percent of your total taxes from the previous tax year or 90 percent of the income tax you expect to owe for the current year. The right of retention will be released if your offer is accepted and the amount of the agreed offer has been paid in full. You can provide additional verification or documentation to support a different assessment than that of the employee who is investigating your offer.
When an offer is not met, the IRS can collect or file a lawsuit to collect the full balance of the offer or an amount equal to the original tax debt minus any payments received under the terms of the offer. If you qualify, you are not required to make any payment of the application fee at the time of submission or during consideration of your offer. If you no longer have the original Form 656, you can file a new Form 656 with the same amount of the offer and the same terms as the original. Your down payment should be 20% of what you offer to pay (if you pay in five or fewer installments) or your first monthly installment (if you pay in six or more monthly installments).
You can indicate in writing which tax debt you want to apply your offer payments to when the offer is submitted or when the payment is made. The IRS can file or maintain tax liens until it accepts your offer and you have fulfilled your end of the bargain. You must comply with the filing and payment of all tax returns for a period of five years from the date the commitment offer is accepted, including extensions. The question about collectability occurs when you agree with the amount due, but you cannot pay the full amount due.
Paying in full would create economic hardship or would be “unfair and inequitable” due to exceptional circumstances. Even if you qualify for an OIC, remember that you must still be able to pay the amount needed to settle the tax bill.