Does an Offer in Compromise Affect Your Credit?

An Offer in Compromise (OIC) allows taxpayers to resolve their tax liability with the Internal Revenue Service (IRS) for a lower amount than what they originally owe. This arrangement can provide a fresh start for individuals facing significant financial hardship due to tax debt. A common concern for many considering this option is how such an agreement might influence their credit standing. This article explores the relationship between an OIC and credit, providing clarity on its implications.

Understanding the Offer in Compromise

An Offer in Compromise represents a formal agreement between a taxpayer and the IRS to settle a tax debt for less than the full amount owed. The IRS considers various factors when determining whether to accept an OIC, primarily focusing on the taxpayer’s ability to pay. The agency assesses the taxpayer’s current financial situation, including income, expenses, equity in assets, and future earning potential, to determine a reasonable collection potential.

The IRS accepts an OIC based on one of three grounds: doubt as to collectibility, doubt as to liability, or effective tax administration. Doubt as to collectibility is the most common reason, meaning the IRS believes it cannot collect the full amount of tax owed because of the taxpayer’s financial circumstances. Doubt as to liability means there is a genuine dispute as to whether the taxpayer actually owes the tax debt. Effective tax administration applies when there is no doubt about the amount owed or the ability to pay, but requiring full payment would cause the taxpayer significant economic hardship or would be unfair and inequitable.

Impact of an Offer in Compromise on Credit

An Offer in Compromise itself does not directly appear on a taxpayer’s credit report. The IRS does not report the acceptance or rejection of an OIC to credit bureaus. Therefore, the OIC agreement itself does not directly affect a credit score or appear as a specific entry on a credit history.

While the OIC itself is not reported, the underlying tax debt or certain IRS enforcement actions that may precede an OIC can significantly impact credit. For instance, if the IRS has filed a Notice of Federal Tax Lien against the taxpayer’s property before an OIC is submitted or accepted, that lien will likely already be a matter of public record and appear on credit reports. The OIC process is a resolution tool for existing tax debt, and credit impacts often stem from the debt itself or prior collection activities, rather than the OIC agreement.

Other Tax Issues and Your Credit

While an Offer in Compromise does not directly impact credit, other tax issues and IRS collection actions can significantly affect a taxpayer’s credit score. A Notice of Federal Tax Lien, once filed by the IRS, becomes a public record and is typically reported to credit bureaus. This filing can severely damage a credit score and make it difficult to obtain new credit, loans, or even housing. The lien acts as a legal claim against all of a taxpayer’s property, including assets acquired after the lien is filed.

Unpaid tax debt, even before a lien is filed, can indirectly affect creditworthiness. If a taxpayer is consistently defaulting on tax obligations, it may indicate broader financial instability that could be considered by lenders, even if not directly reported to credit bureaus. Additionally, if the IRS assigns certain non-tax debts to private collection agencies, those agencies might report the debt to credit bureaus, impacting scores.

Before 2018, federal tax liens were consistently reported on credit reports, but major credit bureaus have since removed them from consumer reports. However, lenders may still search public records for such liens, which can negatively influence their lending decisions. The IRS will file a tax lien if a taxpayer has an outstanding tax bill and has not made payment arrangements.

The Offer in Compromise Application Process

The Offer in Compromise application process involves meticulous preparation and careful adherence to IRS requirements. To begin, taxpayers must gather comprehensive financial data, including proof of income, detailed expense records, current asset valuations, and liability statements. This information is used to complete specific IRS forms, such as Form 433-A (OIC) for individuals or Form 433-B (OIC) for businesses, which provide a detailed snapshot of financial condition.

These forms, along with Form 656, Offer in Compromise, are available on the IRS website and must be completed accurately using the gathered financial details. Taxpayers must also include a non-refundable application fee, which is typically around $205, unless they qualify for a low-income exception. This exception generally applies if the taxpayer’s income falls below a certain threshold based on federal poverty guidelines.

Once all forms are precisely filled out and supporting documentation is organized, the complete application package is mailed to the correct IRS address, which varies depending on the taxpayer’s location. After submission, the IRS begins its review process, which can take several months, often ranging from six to nine months for less complex cases.

Other Tax Issues and Your Credit

A Notice of Federal Tax Lien, once filed by the IRS, becomes a public record and is typically reported to credit bureaus. This filing can severely damage a credit score and make it difficult to obtain new credit, loans, or even housing. The lien acts as a legal claim against all of a taxpayer’s property, including assets acquired after the lien is filed.

The Offer in Compromise Application Process

These forms, along with Form 656, Offer in Compromise, are available on the IRS website and must be completed accurately using the gathered financial details. Taxpayers must also include a non-refundable application fee, which is currently $205, unless they qualify for a low-income exception or are submitting an offer based on doubt as to liability. The low-income exception generally applies if the taxpayer’s income falls at or below 250% of the federal poverty guidelines for their family size.

Once all forms are precisely filled out and supporting documentation is organized, the complete application package is mailed to the correct IRS address, which varies depending on the taxpayer’s location. After submission, the IRS begins its review process, which can take several months, typically ranging from six to twelve months. For more complex cases or due to inventory levels, the investigation can extend up to twenty-four months.

During this review period, the IRS may request additional information to verify financial details or conduct an interview with the taxpayer. It is important to respond promptly to any such requests to avoid delays in processing the application. The IRS will communicate its decision regarding the acceptance or rejection of the OIC through official correspondence once the review is complete.