When you’re trying to settle your IRS tax debt through an Offer in Compromise (OIC), one of the first decisions you’ll need to make is how you plan to pay. The IRS offers two payment methods: Lump sum and periodic payment. You should understand the difference between them so you can choose the option that’s best for your financial situation.
Lump Sum vs Periodic Payment
With a lump sum offer, you pay the full settlement amount within five months of the IRS accepting your offer. You’ll need to pay 20% of your total offer upfront. Once the IRS accepts your offer, you’ll pay the remaining amount in a few installments until your balance is fully cleared.
A periodic payment offer allows you to spread your payments over 6-24 months. You’ll have to submit your first monthly payment upfront. The key difference is that you’ll keep making monthly payments while the IRS reviews your offer, which can take several months.
How to Choose a Lump Sum or Periodic Payment OIC
The lump sum option has a shorter timeline, but the 20% upfront payment is non-refundable. With periodic payments, you pay less upfront, but you may end up having to make a higher total offer amount.
For both options, the IRS uses your reasonable collection potential (RCP) to determine the minimum offer amount they’ll accept. Lump sum offers use a 12-month multiplier on your monthly disposable income. Periodic offers use a 24-month multiplier, which typically results in a higher overall offer amount. If you can afford the lump sum, you may save money in the long run.
- Choose a lump sum offer if you have access to the necessary funds and want to resolve your debt more quickly.
- Choose a periodic offer if your budget is tighter and you need more flexibility, even if the total offer ends up slightly higher.
Getting Help with Your OIC Application
At Highland Tax Group, we help taxpayers like you navigate this process. We’ll calculate your offer amount, walk you through the pros and cons of each payment method, and ensure your paperwork is complete and accurate before you submit it. If you’re unsure which option is best for you, set up a consultation with our tax experts today.