Common IRS Offer in Compromise Mistakes to Avoid
When you owe the IRS and can’t pay, it’s tempting to ignore the issue, but you shouldn’t be afraid. If you assume the tax debt, there are several consequences—like wage garnishments, tax liens, and levies. These are in addition to penalties and interests. The good news is, the IRS offers tax resolution programs to pay your tax debt in a more manageable way. While the IRS Offer in Compromise is an attractive option, this tax debt settlement method isn’t available to everyone. Still, it’s an effective solution that assures the process and payments run smoothly from start to finish.
Mistakes that May Ruin Your IRS Offer in Compromise
Minor mistakes have a significant impact on an IRS Offer in Compromise (OIC). Some may cause confusion or delays, but some can lead to rejection of your OIC request.
At True Resolve Tax, we’ve worked on hundreds of OIC submissions, and we’ve been able to identify the six most common mistakes which can result in your OIC being rejected.
- Leaving Blank Spaces
When a Form 433 for an OIC is not filled out, the IRS has no choice but to deny it. Blank spaces without an explanation can cause the IRS to wonder if you don’t understand the kind of information required.
It’s highly recommended to write either zero or “N/A” if the spaces aren’t applicable. When in doubt, refer to the IRS website to clear up any questions related to filling out the form. As a rule, avoid leaving blank spaces.
Keep in mind that hiring a tax professional can be quite helpful in submitting and overseeing your OIC for the past due taxes.
- Making Mathematical Calculation Errors
The IRS may deny an OIC due to simple mathematical errors like adding up basic figures. It’s crucial to recheck the numbers when you’re filling out Form 433.
If the figures in the form don’t add up, the entire OIC process will stop until you correct the miscalculation. You should always avoid computation errors. They are similar to mathematical errors but are specific to tax-return entries (write-offs, taxable income, and estimated tax payments).
Advice: Seek tax professionals who can easily spot these errors and review your application for accuracy before you send it to the IRS.
- Hiding Financial Information
When you send an OIC to the IRS, they review your claims on assets, property, and financial statements.
The IRS makes sure everything adds up. Anything purposefully not mentioned in Form 433 will lead to an automatic rejection of an OIC.
You could be faced with an additional penalty, which could lead to a criminal court proceeding. You must be honest from the start and provide the IRS with all the information available.
- Writing Negative Equity
A frequent mistake in OIC submissions is when the property is worth less than what is owed on it.
Any assets with negative equity should be reported as having zero equity. You can’t subtract the negative equity from the taxpayer’s net realizable equity (NRE).
- Failure to Reveal Finances
When you’re submitting an OIC, you’re expected to disclose all your financial information. The IRS expects you to reveal the assets you own, the money you’ve saved, and the amount of money you earn.
The IRS can request you to provide these details when you’re verifying your financial disclosure:
- Income earning statements
- Bank records
- Financial statements including dividends, annuities, and investments
- DMV records
If you’re honest when making your submission, you’ll avoid the IRS denying your offer in compromise.
- Non-Compliance with Tax Returns
You may think it’s best to fail to file taxes, but you’ll be putting your OIC in jeopardy of being turned down. As the IRS is processing your OIC request, you’re required to continue submitting your tax returns on time.
Once the IRS approves your OIC offer, make sure you don’t miss payments. At this point, negligence will not be accepted; the IRS is likely to revoke any offer.
- Skipping Tax Returns
Even after your OIC application has been approved, the IRS will continue tracking your tax behavior.
You’ll have to regularly file your taxes for at least five years after the acceptance of an OIC. Pay tax installments regularly to avoid retraction of the IRS offer in compromise.
- Heavy Spending
Going on a spending spree (buying expensive gadgets and luxury items) won’t help your case, especially when you’re trying to prove financial hardship.
If the IRS notices huge spending habits, it may ask you to resubmit information about your assets and income. It may also suspect you have more money than you initially disclosed when applying for OIC. It may deny your OIC because you are overspending.
- Not Checking the Statute of Limitations
Most taxpayers don’t even know this mistake exists. Usually, the IRS has ten years to collect tax debts. This period may be disrupted if you:
- Filed for bankruptcy
- Filed an offer in compromise
- Requested and defaulted on an installment agreement
Before you submit a new OIC, you should check whether the tax debt is active or it’s past the statute of limitations. A tax professional can help you obtain your tax records.
Looking to Settle Your Tax Debt with an IRS Offer in Compromise?
An IRS offer in compromise can be the best way to resolve your past tax debts. Since we are Enrolled Agents, True Resolve Tax will work to help you evaluate your options and complete filing any forms needed when making the request.
At True Resolve Tax, we help you avoid these common mistakes and vastly improve your chances of having an OIC approved.