Of the various tax resolution methods, we present to our clients, the IRS offer in compromise is one of the most popular. If successful, it provides you a golden opportunity to settle your tax debt for a fraction of the amount originally demanded by the IRS. In this article, I’ll explore this IRS settlement method in greater detail and describe how True Resolve Tax can assist you.
Fresh Start Initiative and Payment Options
In 2012 the IRS relaxed its OIC rules which led to a rise in the number of successful applicants. The new rules were generally more lenient than in the past.
If your application for an IRS offer in compromise is successful, you will have two main options to use in paying off your tax debt. The first one is the lump sum option, which allows you to clear your arrearages in 5 months or less after your offer is accepted. While submitting a lump sum payment offer, you must pay a non-refundable fee amounting to 20% of the offer amount.
The other option is the periodic payment offer. It allows you to pay your tax debt in monthly installments ranging from 6 to 24 months after the offer is accepted. Other than the application fee, you are required to include the first installment payment of your proposed offer as part of the application.
Eligibility for IRS Offer in Compromise
In order to qualify, these are some of the situations that will determine your eligibility:
Doubt as to Liability
This occurs if you can manage to convince the IRS that the tax bill you’re being asked to pay is incorrect. You can do this by either producing documents showing you owe the tax agency less or proving that an error was made in calculating your taxes.
Doubt as to Collectability
Your IRS offer in compromise is more likely to be accepted if the tax agency determines your inability to pay it in full in the future. For it to succeed, the IRS must conclude that your offer is more reasonable than the amount it would receive through enforced collection or a payment arrangement.
The tax agency must also determine that your financial situation is unlikely to improve in the foreseeable future. To improve the chances of your offer being accepted, it should ideally be equal to or more than your Reasonable Collection Potential (RCP). This potential is calculated using form 433-A (OIC).
Effective Tax Administration
The tax agency will give your IRS offer in compromise application favorable consideration if there is a reason to believe that settling your tax debt will cause you financial hardship.
Other than the above eligibility requirements, I would advise you to ensure you meet the following qualifications before applying for OIC:
- File all necessary federal tax returns.
- Ensure you’ve not recently filed for bankruptcy.
- Be ready to pay the IRS offer in compromise application fee, which currently stands at $186. This fee is not required if the application is categorized under doubt as to liability. This fee may also be able to be waived if your income falls below the Federal Poverty Level.
- If applying as a business, make all necessary federal deposits for two quarters prior to submission.
- Have all necessary documents.
- If self-employed, make sure your estimated tax payments are up to date for the entire year to show you will not owe again.
How to Apply for Offers in Compromise
Before assisting my clients with their IRS OIC applications, I like to make sure they meet all eligibility requirements. The tax agency has a set of pre-qualifiers that are used in determining whether you qualify.
You’re also expected to provide full financial disclosure in the form of documents showing your income, assets, liabilities and other necessary bills. These documents include but are not limited to:
- Bank, credit card, investment, health care, and loan statements
- Mortgage payment receipts
- Childcare, utility and grocery bills
- Lease or rental records
- Tax return documents associated with the tax debt
As a tax resolution expert, this is one of the tasks I assist my clients with. Other than financial documents, there are other forms to be filled when applying for the IRS offer in compromise. These are:
- Form 656. This is the one you’ll use when applying for an OIC unless you’re doing so because you doubt the accuracy of the tax liability.
- Form 656-L. Used when applying under the “doubt as to tax liability” category. If you pick this option, you’ll not be required to fill form 433-A below.
- Form 433-A (OIC). This form is used to assess your financial capability. Taxpayers fill information regarding their assets, liabilities, expenses, and income. This information is then used by the IRS to calculate its Reasonable Collection Potential (RCP).
- Form 433 B (OIC). Used by business entities applying for the IRS offer in compromise. As with form 433-A, the information contained in this document is used to assess a business’ ability to pay its tax debt.
After application and review of the OIC offer, it will be either accepted or rejected. If it’s the latter, you will receive mail explaining the reason for the rejection. You’ll also be given a detailed explanation of how you can go about appealing the decision to the tax agency’s Office of Appeals. A rejected offer could extend the IRS timeframe to collect on your debt which is why it is so important to make sure you are submitting an acceptable offer.
In some instances, the IRS will return your offer because of errors made during application. Such errors might include failing to attach some important documents, failing to pay the necessary application fee, or failing to acknowledge a prior bankruptcy. A returned offer differs from rejection in the sense that you can’t appeal it. It simply makes sense to have a tax resolution professional committed to assure this does not happen.
Important Points to Note
If successful, it could mean a huge step toward financial freedom. However, if you default on payments after a successful OIC application, the consequences could be severe.
Other than imposing the original tax debt and associated penalties, the tax agency will redirect all refunds you’re eligible for toward reducing your tax debt.
Make sure you are not offering less than what the reasonable collection potential is. Offering a substantially lower amount in your IRS offer in compromise application might increase its chances of getting rejected.
Due to the complicated nature of the application process, it’s advisable to hire a qualified tax resolution expert to do it on your behalf.
True Resolve Tax has years of experience in tax resolution. Beyond our unmatched expertise, we’re also known for our high moral standards, compassion, timely service delivery, and honesty. If you hire us as your tax resolution experts, we will do our best to deliver a positive outcome.
If you’ve been thinking of the various methods you can use to pay off your tax debt, I would suggest you investigate the IRS offer in compromise. If successful, you will not only pay a lower amount in tax debt but will also get rid of all the uncertainties that accompany tax demand notices. Contact us today for customized solutions to your tax issues. If you’re in Denver, CO., you’re always welcome to meet us face to face.