One of the most sought-after options for dealing with IRS tax debt is the IRS Offer in Compromise (OIC), a program designed to benefit both the taxpayer and the IRS. Working with a tax lawyer is the best way to find out if you qualify for an IRS offer in compromise and make an application the IRS is more likely to accept.
An IRS offer in compromise is basically a legal exception for paying less than the total amount of tax owed. Our skilled tax attorney has an extremely high acceptance rate for the offers that I submit on behalf of my clients for the following reasons:
- I only submit offers for people that are strong candidates for an offer
- I know the legal intricacies of the offer process
- I understand how offers are reviewed by Offer Examiners
- I have been preparing and filing offers for 12 years.
Don’t be fooled by individuals or out-of-state firms that claim they can reduce your tax debt for pennies on the dollar without having analyzed your IRS tax transcripts, without knowing the collection statute expiration date for each tax period owed, and without knowing your personal IRS allowable expenses.
The IRS has strict requirements for the Offer in Compromise program. In addition to proving that you can only afford to pay the settlement, you also must be current on your tax obligations. That means you need to file back taxes and keep up with your filing and payment options for a certain number of years after the IRS accepts your offer.
What Is the IRS Offer in Compromise?
When confronting an IRS tax debt, one of the most effective tools at a taxpayer’s disposal is an offer in compromise (OIC). This legal provision enables a taxpayer to settle their tax debt for a reduced amount, often less than what they initially owed. The Internal Revenue Service allows an offer in compromise as it believes that collecting a reduced amount is more feasible than waiting for a potential full payment, which might never arrive due to various financial constraints or genuine disputes about the correct tax debt amount.
Taxpayers might consider an offer in compromise for various reasons. These could range from financial hardships such as unexpected medical expenses, job losses, or any other factors that significantly impact a person’s monthly income. Genuine disputes regarding the total tax liability are also grounds for an OIC.
How the IRS Decides Whether to Accept an Offer in Compromise
The IRS’s decision to accept an offer in compromise is not arbitrary. They meticulously evaluate the taxpayer’s assets, including bank accounts, properties, and other valuables. The Internal Revenue Service also factors in the taxpayer’s anticipated future income, juxtaposing it against their basic living expenses.
Key criteria include:
Doubt As to Liability
Is there uncertainty or a genuine dispute about the correct tax debt amount? If the IRS is less than 100% sure about the amount owed, they may be more willing to accept an offer in compromise.
Doubt as to Collectibility
Does the IRS believe they might not recover the full tax liability based on a taxpayer’s assets and future income? If so, they are more likely to agree.
Effective Tax Administration
Will collecting the full amount result in economic hardship or seem inequitable due to exceptional circumstances? The more true this is for a taxpayer, the greater the likelihood the IRS accepts the offer in compromise.
It’s essential to note that the IRS won’t consider an OIC if a taxpayer hasn’t filed the necessary tax returns or if they haven’t made the required estimated tax payments or federal tax deposits.
When it comes to settling IRS tax debt via an offer in compromise, there are specific payment options available. The lump sum offer requires an initial payment and the rest to be paid in five or fewer payments within five or fewer months.
With a periodic payment, the taxpayer submits their initial payment with the application and continues to pay the remaining amount in monthly installments over the duration of six to 24 months until they settle IRS tax debt.
For both options, it’s imperative to have made all required federal tax deposits and estimated payments. Failure to do so can result in the IRS rejecting the offer.
What Is the Minimum Offer Amount on an OIC?
Determining the minimum offer amount is a critical aspect of the offer in compromise process. Essentially, the IRS evaluates a taxpayer’s ability to pay by looking at the combination of their assets and anticipated future income.
The amount that the IRS determines you can pay, based on the financial information provided, is considered your “reasonable collection potential.” This amount often dictates the minimum you can offer to settle your IRS tax debt.
All payments made under an OIC are non-refundable. Additionally, while the offer is being evaluated, federal tax law mandates that the IRS apply these payments to the tax bill in question.
What You’ll Need to Reveal to the IRS
In the offer in compromise program, the IRS requires an in-depth look into the taxpayer’s financial situation. This involves more than just monthly income and basic living expenses. The IRS will examine assets like bank accounts, properties, and even potential future income. They may also assess other financial details, such as charitable contributions, to gauge a taxpayer’s ability to settle their tax debt.
Getting an Offer in Compromise (OIC) approved by the IRS isn’t just about presenting a number that you think might work for both you and the agency. The IRS uses a comprehensive process to determine whether a taxpayer’s offer is acceptable, and this involves a deep dive into one’s financial situation.
Here’s a closer look at what you’ll need to reveal:
Detailed Financial Statements
The IRS will expect a detailed rundown of your monthly income sources and expenses. This isn’t just your paycheck: it’s every stream of income, whether that’s freelance work, dividends from investments, rental income, or any other source.
Information about any property you own, whether it’s your primary residence, rental properties, or undeveloped land.
This encompasses cars, boats, motorcycles, and any other vehicles.
This includes checking, savings, and even overseas accounts, as well as details about 401(k)s, IRAs, and other retirement accounts.
Certain types of life insurance policies have a cash value.
If you own a business, you’ll need to provide details about its assets, accounts receivables, equipment, and inventory. Personal assets can include jewelry, artwork, and other valuable items.
Debt and Liabilities
You’ll also need to inform the IRS about your liabilities, like mortgages, student loans, car loans, or any other debts. This helps the IRS determine your net worth.
Monthly Living Expenses
Expect to detail your regular monthly expenses, from your rent or mortgage payment to groceries, utilities, and even entertainment and monthly subscriptions.
However, keep in mind that the IRS will compare your claimed expenses with national and local averages and evaluate everything you report according to low income certification guidelines. If they believe your expenses are excessive, they may adjust them downwards.
Proof of Financial Hardship (If Applicable)
If you’re arguing that paying your tax liability in full would lead to an economic hardship, be ready to provide evidence. This might include details of medical bills, documentation of unemployment, or other indications of financial distress.
Collection Information Statement
To assist in gathering all this information for an IRS offer in compromise, the IRS provides Form 433-A (OIC) for individuals and Form 433-B (OIC) for businesses. These forms, known as Collection Information Statements, provide a framework for detailing your financial situation. It’s crucial to fill them out accurately and honestly, as misleading the IRS or providing false information can lead to your offer’s immediate rejection and potential legal consequences.
The more thorough and detailed you are in presenting your financial situation, the better the chance your IRS offer in compromise will be accepted. Consult with our legal services to ensure you’re presenting your case in the best possible light. We’re here to guide you every step of the way, ensuring you meet all requirements and stand the best chance of reaching a favorable outcome.
Other Things to Know About IRS Offers in Compromise
An essential aspect of the offer in compromise is ensuring you’re in compliance with all tax requirements. The IRS will not consider your offer if you haven’t been filing your tax returns, for example.
You should also understand that having an offer accepted doesn’t automatically mean all other tax debts are wiped out. The specific tax debt included in the OIC will be settled, but any other tax liabilities remain. Also, be aware that there’s an application fee for an IRS offer in compromise.
Options for Rejected Offers
It’s a common misconception that once the IRS rejects an offer in compromise, there’s no other recourse. However, if the IRS rejects your offer, you have 30 days to appeal the decision. It’s during this period that the expertise of legal services can be invaluable, helping you navigate the reasons for rejection and potentially restructure your offer or provide additional information.
If you are unable to qualify for an IRS offer in compromise, here are some of the more common alternative solutions:
1. Installment Agreement (IA)
An installment agreement allows taxpayers to pay off their tax liability over a set period in monthly installments. While interest and penalties continue to accrue on the outstanding balance, this option can make the debt more manageable for those who cannot pay the full amount immediately.
2. Temporary Collection Delay
In certain cases where the taxpayer is undergoing significant financial hardship, the IRS might agree to temporarily delay collection activities. It’s essentially marking your account as “currently not collectible.”
While this doesn’t eliminate your debt, it prevents the IRS from pursuing aggressive collection actions like levies or liens for a period. However, during this time, penalties and interest continue to accumulate on your balance.
3. Penalty Abatement
If there were reasonable causes for your tax errors or delays (e.g., serious illness, unavoidable delays, erroneous advice from a tax professional), you could request a penalty abatement. If the IRS approves, some or all of the penalties added to your tax bill could be waived, although the underlying tax and interest might still be due.
4. Full Payment Agreement
If your financial situation has improved since the rejection of your OIC, or you’ve found a way to borrow or obtain the necessary funds, you can choose to pay off the tax liability in full. While this might seem like a stretch, eliminating the debt can provide peace of mind and halt the accrual of additional interest and penalties.
5. Fresh Start Initiative
Launched by the IRS, the Fresh Start Initiative offers expanded options for taxpayers to address their tax debts. This includes longer installment agreements and a more considerable leeway for those trying to get a tax lien released.
While not the first choice for many, bankruptcy can sometimes discharge certain tax debts and may be the right choice for some. However, there are strict criteria, and not all tax debts can be eliminated through bankruptcy. It’s crucial to consult with a bankruptcy attorney to understand the implications and potential benefits.
What Are the Downsides of an OIC?
While an offer in compromise may seem like an attractive option to reduce one’s tax debt, there are some drawbacks. For instance, if your offer is accepted, this information becomes public record. It also impacts your tax refund for the year in which your offer is accepted.
Engaging in the process of an offer in compromise requires careful consideration and in-depth understanding. At Seattle Legal Services, PLLC, we stand ready to provide guidance, ensuring that you’re making the best decision for your unique situation.
The Best Path Forward for Your Compromise Offer
The IRS Offer in Compromise presents an opportunity for taxpayers to find common ground with the IRS, potentially easing financial burdens. Reach out to us today at Seattle Legal Services, PLLC at 206-536-3152 to get the help you need for the best result in your compromise offer.