How Does An IRS Offer in Compromise Work?
An offer in compromise (OIC) is an IRS program that allows
you to make an offer of less than the total amount owed
toward your tax debt.
Making an offer in compromise may be a legitimate option
if you can’t pay your tax liability in full, or if doing
so would create a financial hardship. If the IRS accepts
the offer, you will pay your settlement amount, and the
rest of your debt will be wiped clean. However, the IRS
will only accept your offer if they feel that it is
greater than or equal to the amount they would ever
collect from you
Your offer amount can either be paid in full, or in
periodic monthly installments — whichever best suits your
financial situation.
What to Know Before Applying for an IRS Offer in
Compromise
There are two major points to understand about the OIC
process. Firstly, most offers get rejected (about 60
percent) — the odds are not in your favor. An expert tax
accountant can help you put together a strong application
and increase your chances of acceptance.
Secondly, outside of an audit, an OIC is the most
scrutinizing process a taxpayer can experience. Because of
the significant savings associated with tax settlements,
the IRS offer specialist assigned to your case will
investigate past and current financial transactions, along
with any property and assets.
In short, every aspect of your financial life will be
probed and prodded until no stone is left unturned. The
whole thing can be intrusive, unsettling, and extremely
stressful, so you should consult with a licensed tax
professional before considering this route.
How Do I Apply For an Offer in Compromise?
To apply for an OIC, the taxpayer must complete the Offer
in Compromise Booklet (Form 656-B), which includes:
* Form 656 (Offer in Compromise)
* Form 433-A (for individuals) or Form 433-B (for
businesses)
* Three months of meticulous documentation on every
expense and income source.
* $186 application fee, unless the taxpayer meets the
requirements for Low Income Certification
* The initial offer payment, unless the taxpayer qualifies
for the Low Income Certification
* Form 656-L, if the taxpayer is applying for an OIC due
to Doubt as to Liability
What Happens After I Apply?
As mentioned earlier, it can take up to two years for the
IRS to process your OIC application. The good news? The
IRS will not pursue collections while processing your OIC.
Whether the IRS accepts your proposal or not, this can
provide you with some needed breathing room.
Here are a few important to things to know after your OIC
application is complete:
1)
If the IRS grants a settlement but the taxpayer incurs
further tax liability during the following five years, the
offer will be retroactively rejected and the taxpayer will
owe that money again. We refer to this as the “nightmare
scenario.”
2)
The IRS has two years to accept or reject an offer, during
which the clock pauses on the debt’s CSED.
3) If the IRS rejects an OIC, the taxpayer has 30 days to
request an appeal.
How Much Should I Offer in Compromise to the IRS?
Your offer to the IRS should be equal to your
reasonable collection potential
— a number representing the highest amount of tax the IRS
can collect before your debt expires. The IRS calculates
this amount based on the
total value of assets (real estate, savings, investment
accounts, etc.) and your monthly disposable income after
all allowable living expenses are covered.
Here’s an example of how reasonable collection potential
can be calculated: let’s say that you have $40,000 of
equity in your house and $10,000 in other investments.
This means that your offer amount should be at least
$50,000
(the total of your assets)
, before you account for monthly disposable income. If you
have $200 of disposable income each month (income after
living expenses), the IRS expects you to use that money to
pay off your tax debt.
So if there’s 10 years left before your tax debt’s
Collections Statute Expiration Date (CSED), you should add
$24,000 to your reasonable collections potential. In this
scenario, your Offer in Compromise should total $74,000.
Remember – the IRS uses strict guidelines to determine
which living expenses are allowable, and how to assess the
value of your property. For this reason, it’s very
important to hire a tax professional to put together an
offer that fits the IRS’s criteria.
Who is Eligible?
To be eligible for an OIC with the IRS, the taxpayer must
demonstrate that their tax debt has been legally
compromised
for one of the following reasons:
*
Doubt as to Collectibility
— the taxpayer does not have enough in assets and income
to pay their debt in full.
*
Exceptional Circumstances (Effective Tax Administration)
— the taxpayer does have enough in assets and income to
pay their debt in full, but due to an exceptional
circumstance, doing so would cause a financial hardship.
*
Doubt as to Liability
— the assessed tax is incorrect
In addition, the taxpayer’s filings and estimated tax
payments must be up to date through the current tax year.
This means that if you have missing tax returns – you’ll
have to get them filed before you apply.
Another requirement for an OIC is that the taxpayer must
not be involved in an open bankruptcy proceeding. Let our
team know if this is the case for you, and we’ll find
another resolution option that fits your financial
situation.
What Are the Benefits of an Offer in Compromise?
Applying for an OIC is undoubtedly a serious commitment
and a stressful process. But in many cases, it’s the best
financial option for the taxpayer. There are several major
benefits to proposing an OIC to the IRS:
1)
If the taxpayer cannot pay their debt in full
, or if doing so would cause serious financial hardship,
then an OIC can be their
golden ticket to debt forgiveness and financial freedom.
2) While the IRS considers an OIC, it
suspends all collection activities against the taxpayer.
3) If the taxpayer’s offer is accepted,
the IRS will remove all federal tax liens
filed against them.
Call us today — we’d be happy to assess your options and
answer any questions you may have during a free
consultation.
