Below you’ll find a Question and Answer session produced by the IRS which explains the tax settlement process used for Offers in Compromise and gives detailed information about who qualifies, why the program was setup, and what you should expect if you need to file an OIC.
Note: The IRS conducts presentations via Phone Forums. These presentations are archived on the IRSVideos.gov website for individuals, small businesses and tax professionals. The links to all IRS phone forums are shown at the end of this phone forum transcript.
Q1. I have been asked to file returns for a taxpayer who has no assets, little income, and owes many years of taxes. After all tax returns past due are filed, can an OIC immediately submitted or should the OIC be filed after the returns are processed and notices are received by the taxpayer? (more…)
An Offer in Compromise is an agreement made with the IRS that allows you to settle your tax liability for less than you owe. It can be an option for people who are unable to pay their taxes in full, or for people whom tax payment creates financial hardship. The IRS will consider your ability to pay, income, expenses, and asset equity when determining whether or not you qualify for an Offer in Compromise. The IRS encourages an Offer in Compromise only after all other options have been exhausted. (more…)
Choosing between jail time and negotiating with the IRS to reypay back taxes and fines seems like an easy choice. But for many, their fear keeps them from acting and before long the IRS comes calling.
If you have a tax problem, you don’t have to repeat this mistake. Many people don’t realize that you can often negotiate a lower tax bill with the IRS using what is called an IRS Offer In Compromise or OIC. With an IRS offer in compromise, you can lower your overall tax debt and make monthly payments that let you not only avoid jail time, but wage garnishments and IRS levy’s as well.
Here’s an example of what not to do and more on the IRS Offer in Compromise:
You may have heard that in an IRS Offer in Compromise you can “settle your IRS tax debt for pennies on the dollar” (an Offer in Compromise should not to be confused with general debt relief). This is true in some cases but be wary of any firm that over emphasizes your potential savings without having thoroughly reviewed your case. A review includes reviewing all your tax records.
You have to make an offer to the IRS to settle your debt. After this, the IRS will assess your financial situation and will take into consideration your assets, liabilities and disposable income. After reviewing these factors they issue their ruling.
The aim behind an Offer in Compromise, sometimes abbreviated as OIC, is to increase tax receipts (money coming in to the IRS) by making it easier to you to come forward to the IRS and pay what you can afford.
Offer in Compromise Requirements and Guidelines as stated by the IRS
According to the IRS, you may submit an Offer in Compromise if you meet one of the following requirements.
Doubt as to Liability – You can show doubt that the assessed tax amount is correct.
Doubt as to Collectibility – You must show there is no possibility that you can pay the amount due, or that you are willing to offer the amount of money your financial data shows you should be able to pay. This is the most common method followed by people when filing for an Offer in Compromise. The calculation methods are quite tricky, and could mean the difference between a settlement Offer which is accepted and one that’s rejected.
Effective Tax Administration – The debtor may have the potential to pay back the full amount of taxes owed but exceptional circumstances prevent them from doing so and would create a financial hardship (such as with the disabled or elderly who can’t generate money).
Filing For an Offer in Compromise Settlement
To file an Offer in Compromise settlement, you need to submit a number of forms that vary with your particular situation, such as:
IRS Form 656 – Offer in Compromise – Using this form the taxpayer offers the IRS a settlement amount money in exchange for the IRS not pursuing the remainder of the tax debt.
IRS Form 656-A – Income Certification for Offer in Compromise Application Fee and Payment- If you have a low level of income you may not be required to submit an application fee for the OIC .
IRS Form 433-A – Collection Information Statement for Wage Earners and Self-Employed This form will help the IRS understand your financial situation more closely and allows the IRS to determine if they can collect back taxes from you. This is one of the most important documents in a settlement case. The Form 433-A, along with the complete settlement packet and proposal we create for our clients, is the foundation of your case, and if done incorrectly it can torpedo any chances you had of getting your settlement offer accepted.
IRS Form 443-B – Collection Information Statement for Businesses – This form is similar to form 433-A, but for businesses. You are required to file this form if you want to include your business taxes in an OIC. The same comments apply to the 433-B that I mentioned for the 433-A, except more so. The settlement packet and proposal for a client who has a business or who owes business taxes is very, very sensitive and must be done right the first time. Business financial statements and proposals are best not left to folks who aren’t well-versed in them.
Other things to know about submitting an offer in compromise
There is a $150 application fee to submit your offer
In a lump sum payment offer you must pay the IRS back in five payments or less
In a short term periodic payment offer you can take up to 24 months to pay the offered amount.
In a deferred periodic payment offer you must pay over the remaining statutory period for collecting the tax.
Why You Should Use a licensed tax professional for an Offer in Compromise
The IRS rejected 76% of all Offer in Compromise submissions during the last fiscal year. Those are tough odds. An experienced tax attorney can offer you the protection of attorney-client privilege, plus years of experience in working with the IRS. They use tools to avoid errors that can harm your chances, and their knowhow to maximizes the chances of your Offer in Compromise being accepted. This includes understanding changes to rules and procedures that the IRS makes from year-to-year, or even month-to-month sometimes. The reality is you need true legal expertise to help you with your IRS problem just as you need a medical specialist to help you if you have a heart problem.
The good news is even if you can’t qualify for a reduced tax bill with an Offer in Compromise, many people still qualify for other good options, like affordable monthly IRS payments. The goal is to allow you to resolve your tax issues and move on with your life.
The IRS, and Congress, are a little heavy-handed. And by “a little” I mean “a lot”! Congress issues many, many complex laws and expects people to follow them to the letter. And each law is usually in some way connected to making YOU owe more tax. Thus, Congress’ collection agency, the IRS, normally carries a big stick, ready to whack taxpayers with it in the form of new legislation and more taxes owing.
But recently, the IRS seems to have realized that they can only bleed someone for so long. If they keep taking their pound of flesh, they are eventually left with taxpayers who have nothing else to give. And this is the case even more so now than ever before because of the economic turmoil facing the world.
So, the IRS has “graciously” conceded to “additional steps to help people who owe back taxes”… in particular, for those who are facing “unusual hardships”. . Here are some of those additional steps:
The IRS increased the authority of its employees to suspend collection when there’s a hardship situation. This includes:
Job loss
Social security or welfare recipients
Significant medial bills
Taxpayers who have difficulty making payments (because of a number of reasons including job loss) may skip a payment or pay reduced payments.
Also, the Offer in Compromise has been augmented to allow for drops in home values (which once may have created difficulty in getting the IRS to agree to an OIC). And those who have an OIC agreement but are at risk of default now have options to avoid default.
Lastly, the IRS is speeding up its delivery of levy releases by reducing the requirements that taxpayers must meet when requesting a levy release.
In some ways, it’s nice to see the IRS finally recognizing that it needs to help people who want to pay their taxes but cannot. After all, it costs taxpayers a lot of money to punish taxpayers who aren’t paying their taxes… and law-abiding taxpayers who simply are not able to pay should not face dire consequences, particularly in this economy.
But let’s be realistic: While it’s nice to see the IRS doing something about it, the only reason they’re doing it is because they know that the pound of flesh is running out. They know that they can’t get more money out of taxpayers in the traditional way, and with the economy making it more and more difficult, they have developed “creative financing” to make it happen.
