Some taxpayers wrongly assume the IRS is out to punish them. On the contrary, the tax agency provides various options that tax defaulters can use to settle their debts. The IRS Offer in Compromise (OIC) is one of them. It’s one of the most popular tax settlement methods available, due to the convenience it offers taxpayers. We will shed as much light as possible on the OIC throughout this article.
How Practical is the IRS Offer in Compromise?
In the past, the IRS Offer in Compromise had a relatively low acceptance rate of between 25-30%. The tax agency initiated the Fresh Start Initiative in 2012, in a bid to make it easier for defaulters to settle their tax debts. This willingness to be more lenient with taxpayers prompted the IRS Offer in Compromise acceptance rate to breach the 40% mark.
After submitting the IRS Offer in Compromise application and being approved from this program, you have two main types of OIC payment options availale as practical solutions. A taxpayer can pay their IRS Offer in Compromise through either:
Lump Sum Offer
This option allows taxpayers a repayment period of 5 months from the date of approval. You are required to make a non-refundable payment equivalent to 20% of the lump sum offer when you submit the Offer, but do not make any further payments until acceptance of the offer which then starts the 5-month payment window.
Taxpayers have a more lenient payment period of 6 to 24 months from the date the OIC application is submitted. They are also required to include the first installment amount with the IRS Offer in Compromise application. Then they must pay monthly payments each month while in review and after acceptance until the full amount has been paid.
Eligible taxpayers should complete forms 656 and 433-A (businesses use form 433-B) for the IRS offer in compromise application. You’re encouraged to use the offer in compromise pre-qualifier tool to better assess the chances of your offer being accepted by the IRS.
Why the IRS Offer In Compromise is a Viable Tax Settlement Option
The IRS doesn’t always recommend harsh penalties for tax defaulters. As a reasonable creditor, the agency understands that not everyone with debt deliberately tried to evade tax. It also makes sense to accommodate taxpayers who are willing to settle their debts, instead of intimidating them into hiding from the authorities.
Under certain conditions, the IRS might conclude that accepting an IRS offer in compromise makes more economic sense than resorting to other methods such as wage garnishment and liens. This is particularly reasonable if the taxpayer does not have significant funds in a bank account, or property that the tax agency can put a lien on. These factors may fluctuate the IRS Offer in Compromise acceptance rate.
What are Your Chances of Qualifying for an OIC?
Whenever our clients express interest in the IRS offer in compromise as a tax resolution method, we try our best to make sure they’re eligible. An IRS Offer in Compromise application may have a higher acceptance rate for the following three major reasons:
- Financial difficulties. If a defaulter has debts other than what is owed the IRS, the application might be considered. The tax agency might conclude that it has better chances of collecting a reduced amount.
- The tax bill is unreasonably high. Sometimes a taxpayer might accrue a massive tax debt that they can never hope to pay. All their assets plus any future income projections might not be able to pay it off, leaving an OIC as the only logical recourse.
- Doubt as to liability. If you can show that your tax bill was erroneously calculated, you stand a better chance of qualifying for an OIC.
The IRS has a method of calculating a taxpayer’s ability to repay their debt. This is referred to as the Reasonable Collection Potential (RCP).
How the IRS Calculates Your RCP
As a tax resolution professional, I know how hard the IRS tries to collect the full amount taxpayers owe. The agency does this for two main reasons:
- To meet the federal government’s tax revenue collection targets.
- To prevent unscrupulous taxpayers from taking advantage of the IRS offer in compromise. If one qualifies for the OIC when they could have comfortably paid off their full tax debt, it translates to a loss in revenue for the federal government.
The agency must, therefore, come up with a way to ensure only people who really need tax relief are qualifying and getting acceptance.
The IRS introduced more lenient RCP calculation methods under the Fresh Start initiative. In the past, offers intended to be paid in five or fewer installments were calculated based on four years of the taxpayer’s future income. The period was reduced to a year, which makes it easier for applicants to qualify.
Taxpayers applying for an OIC to be paid in 6 to 24 months will also have their RCP calculated based on 2 years of future income, lower than the previous 5. Any applicant who qualifies for the IRS offer in compromise will be required to settle the entire debt within 2 years from the date of acceptance.
Allowable Living Expenses
The IRS also considers allowable living expenses under the Collection Financial Standards to calculate RCP. Even if a taxpayer’s application for the IRS offer in compromise is accepted, the agreed-upon installments should not be made at the expense of a family’s well-being.
Allowable living expenses should pass the necessary expense test. These are monthly commitments that play a role in keeping a family healthy as well as maintaining their source of income. The IRS has standard calculations for food, clothing and other needs required by an American family. These calculations fall under two broad categories:
These expense projections apply across the entire country, regardless of whether the actual expenses for a taxpayer’s location are higher or lower. The IRS only allows taxpayers to file this fixed amount as monthly expenses if their actual expenses are higher. If your expenses are lower, you will use the actual amount, not the standard amount
Calculations take into consideration food, clothing, housekeeping supplies, personal care needs, out-of-pocket healthcare needs, and miscellaneous items. These standard expenses are calculated from data obtained from Consumer Expenditure Surveys that are conducted by the federal Bureau of Labor Statistics (BLS).
These calculations cover housing and utility expenses. They are more detailed than National Standards because they take into consideration the cost of living from the state all the way to the county. Items considered include mortgage or rent payments, gas, water, electricity, insurance, garbage disposal, telephone services, internet costs, repairs, and property taxes.
Considerations are made for households of different sizes. Transportation standards are also included for taxpayers with motor vehicles. These take into account monthly lease or loan payments, as well as monthly operation costs. Local standards are calculated using data collected from various sources including BLS, the US Census Bureau, and the American Community Survey.
Do you have a tax debt that has been keeping you awake at night? At True Resolve Tax, our Enrolled Agents always strive to assist our clients in the most honest, efficient and cost-effective way possible.
We may recommend that you try the IRS offer in compromise application process. A successful application will have many positive results not just from a financial standpoint, but for your family’s welfare as well. Contact us today for a thorough analysis of your tax debt issues. If you’re in Denver, CO., feel free to visit our offices for a productive face to face meeting.