As far as tax debt settlements go, the IRS offer in compromise (OIC) is one of the most favorable solutions. At True Resolve Tax, we receive numerous inquiries about it because it allows taxpayers to settle for a fraction of what they owe.
The IRS doesn’t accept all OIC applications. The requirements are more stringent compared to the IRS installment agreement and other payment methods. Sometimes successful applicants still fail to come up with the offer amount, rendering it void.
Do You Qualify for an IRS Offer in Compromise?
Your ability to pay the IRS offer in compromise is partially calculated based on the collection statute expiration date. This is the amount of time the agency has to collect your tax debt before it legally runs out of time.
The IRS refers taxpayers to tools such as the OIC pre-qualifier tool to determine applicants’ eligibility. Your chances of qualifying improve if you can show an inability to pay the total amount due.
All necessary requirements are contained in the OIC booklet.
How the Offer Amount is Determined
The process begins when you make an offer to the IRS using Form 656. The tax agency expects you to offer a reasonable amount based on the financial calculation, as opposed to the lowest one you can think of.
A general rule is to calculate your assets and take your income and deduct basic living expenses so as to determine a suitable offer. This is known as your Reasonable Collection Potential (RCP).
You will also be required to fill and submit Form 433-A OIC, which calculates your financial strength. By reviewing your assets and expenses, the IRS can decide whether accepting your offer serves its best interests.
You shouldn’t stress too much over making a perfect offer. It’s difficult on your own to figure out the exact amount the tax agency will respond positively to. Sometimes an offer might be accepted on the condition that you agree to pay a slightly higher amount.
Before your IRS offer in compromise is considered, you must satisfy some strict eligibility requirements. These include:
- Up to date Tax Deposits
If you own a business, ensure your quarterly payroll tax deposits are promptly made. For your OIC offer to be considered, your deposits for the current and past two quarters must be up to date.
If you are self-employed, you need to ensure your quarterly estimated tax payments are up to date for your income for the year.
- No Pending Bankruptcy Proceedings
Bankruptcy proceedings nullify any chance of your offer being accepted because they take priority in addressing your tax debt. Other than discharging select debts, bankruptcy only covers debt that’s more than three years old.
It also remains a part of your credit report for at least 7 years, which makes it hard to borrow in the future. Bankruptcy attorneys are also generally more expensive than tax resolution experts. You should only consider it after exhausting all other tax settlement options.
- Up to date with Tax Returns
Applying for an IRS offer in compromise doesn’t excuse you from current tax obligations. Your tax returns must be paid on time, even if you have an outstanding debt with the IRS.
- No Current or Pending DOJ Proceedings
If you have a tax-related criminal case with the Department of Justice, your OIC application will be denied. This is applicable for every year the case will be active.
You should include a bill for at least one tax debt with your offer. Other situations to avoid include an open audit, as well as an outstanding or pending innocent spouse claim lodged with the IRS.
Meeting these eligibility requirements won’t guarantee that your offer will be accepted but will ensure your eligibility to submit one.
Situations that Increase Your Prospects
The IRS offer in compromise receives a success rate of roughly 40%. There are three instances that increase your chances of this coveted group:
- Doubt as to Liability
It occurs when there is genuine doubt as to the existence or exact amount of tax debt owed under the law. Doubt doesn’t exist if the debt has been determined by a court of law.
- Doubt as to Collectability
You can make an IRS offer in compromise on the basis that you admit to owing the amount in question but are not in a position to pay in full. This allows you to make an offer based on your reasonable collection potential.
- Effective Tax Administration
This happens when you admit to owing the amount being demanded by the IRS. You also agree that the amount can be recovered but doing so would put you in serious financial hardship.
Other situations that make your offer more likely to be accepted include:
- Being a retiree with a fixed income.
- Having consistent income below the poverty level for your family size.
- You’re on the verge of bankruptcy caused mainly by tax debt.
Being as honest as possible with the IRS makes success a more likely outcome.
Although there are various reasons for rejection, sometimes it happens because the applicant didn’t pay attention to detail. Common causes include:
- Making a low offer. This occurs if the IRS believes it can recover more than the amount you’re suggesting.
- Failure to give satisfactory information regarding your assets, income and other financial requirements.
- Failure to stay up to date with tax returns and other tax-related requirements. If you can’t service your current obligations, the IRS will conclude you wouldn’t pay even if your offer was accepted.
- Being convicted of a serious crime.
Having your offer rejected isn’t the end of the road. You can submit a new offer with a higher amount than the previous one. If you do so within 30 days of the last offer, you don’t have to fill out a new Form 656. You can write a letter explaining the revised offer amount. You do want to be careful in regards to having repetitious submissions be viewed as a collection delay tactic.
Under some circumstances, we might advise clients to avoid applying for an IRS offer in compromise because it’s highly likely to be rejected. A good example is when you’ve never been in compliance with the tax code. Even if your offer gets accepted, you must remain in compliance for at least five years afterward.
If previous offers have been rejected, future ones are also likely to suffer the same fate. The best way of determining your chance of success is by contracting a tax resolution expert to help you.
Our Clients’ Interests Come First
At True Resolve Tax, we utilize our experience and expertise into making sure all your tax issues are resolved in the best possible manner.
Whether you’re a prime candidate for the IRS offer in compromise or any other tax settlement method, we’ll help you figure it out in a professional way. As Enrolled Agents, we’re also authorized to represent you before the IRS concerning your tax debt. You don’t have to walk alone during these trying times. For more information on our services, don’t hesitate to contact us as soon as possible.
If you live in the Denver area and would like to learn more, give the licensed tax experts at True Resolve Tax a call. Their team of specialized, licensed tax professionals offer commitment, experience and the expertise to solve your tax problems today, and their unique personal approach will provide you with the peace of mind to know that your tax issues are in good hands. They can help you with business or individual tax resolution, tax preparation, bookkeeping, accounting, payroll, understanding the IRA and all your income and tax-related needs. Call today and schedule a free consultation to discuss your tax issues.