Offer in Compromise
What is the Offer in Compromise Program?
The Offer in Compromise or OIC program is an IRS program that allows individuals with unpaid tax debt liabilities to negotiate a settlement amount that is less than what is owed to clear the IRS tax debt. Should you need any assistance, Ideal Tax offers tax settlement services here.
A person who owes money but can’t afford the full amount due to financial hardship may be able to offer the IRS a lower, more affordable settlement. This is called an offer in compromise (OIC). This offer could include a lump-sum payment or a series over several months. The IRS offers a forgiveness program for any remaining debt if it accepts the OIC. This contrasts with traditional IRS payment plans.
Some people may not be eligible for the OIC program. The OIC program is only available to taxpayers who have filed all their tax returns. They cannot have a bankruptcy case open. They will also need to make an initial payment as well as pay an application fee. Low-income applicants do not need to pay an initial fee. To determine if they are eligible, taxpayers can use the IRS Pre-Qualifier tool.
To determine whether a taxpayer is eligible for the OIC program, he or she uses the checklist found in Form 656, Offer In Compromise. OIC is a program that accepts a compromise when it is in both taxpayers’ best interests and the government. It encourages voluntary compliance with all future filing and payment requirements.
Only eligible taxpayers are eligible to receive offers in compromise. It is not enough to just want to reach a compromise with the IRS. Everyone would like to see his tax bill reduce. The Ideal Tax specialist can help taxpayers determine if they are eligible.
To be eligible for an OIC settlement, a taxpayer must meet at least one of the following conditions:
- Doubt about Liability — The debtor can prove that the tax liability has been correctly assessed
- Doubt about Collectability — The debtor can demonstrate that the debt is unlikely to be collected in full by IRS under any circumstances
- Effective Tax Administration — The debtor cannot contest the liability or collectability but can show that there are extenuating circumstances or special circumstances that would make it impossible to collect the debt.
The OIC program can be used by any taxpayer, but it is most useful for those who are disabled or elderly.
The IRS requires that you submit an offer. You can’t just call them and say, “Let’s make some deals.” Start by filling out IRS Form 656, Offer In Compromise. For filing an OIC, there is a $186 fee. You must attach Form 656. If your monthly income falls below the poverty guidelines, you might be exempted from paying the fee. You must complete the Fee Worksheet in the Form 656 booklet to claim the exemption from poverty guidelines.
You must submit detailed financial information to IRS via Form 433 A (individuals) and Form 433 B (businesses), Collection Statement. If you’re married and you live in a state with community property, the IRS might request that your Collection Statement contain data about your spouse. This is even if you owe nothing to the IRS. If you’re serious about your OIC, take extra care to fill out this form correctly. When you submit this form, the IRS will scrutinize your disclosures more than when you ask for monthly installments to pay your taxes.
Submitting an OIC
The first step is to complete the forms. The IRS will request a lot of financial documentation, including pay slips, bank records, vehicle registrations, and many other documents. This can be a tedious and time-consuming process. To support their OIC requests, some taxpayers end up having to submit boxes loads of documents.
The OIC submission has another disadvantage. The IRS can use the information you provided about your assets to speed up its collection efforts against your OIC if it rejects your OIC. It is best to not submit an offer unless you are likely to accept it.
Remember that interest accrues during the offer-in-compromise negotiation process. This means you will end up owing more if you don’t make a deal.
What Should You Offer?
To calculate your minimum offer amount, you will need to use the instructions provided on Form 433. Based on your financial disclosures in Form 433, the IRS is interested to know what your collection potential is. Your offer must be equal to:
- The “net realizable value”, or the sum of all your assets.
- Your excess monthly income after deducting your monthly expenses from the monthly income.
Then multiply that amount by 12, 24, or 24 depending upon the payment period (either 5 months or 2 years). To calculate and show the IRS how to arrive at your minimum offer, follow the instructions on Form433-A (OIC).
Concerns about Tax liability
Doubt as a liability offer is an offer in compromise that is based on a legitimate suspicion that you owe any portion of the tax debt. If a taxpayer files an Offer based upon a theory of doubt about liability (or the DATL), they will need to prove that they did not have an opportunity to dispute any tax liability. The IRS will deny relief if the taxpayer can prove that they received the correct notices of assessment but failed to act or challenge the tax in the context. A Compromise offer based only on Doubt about liability is not subject to financial information.
Doubt about collectability
Doubt about the collectability offer is when you agree to owe back taxes but cannot pay your tax debt in full. You must submit a suitable offer that is based on your true ability to pay the IRS to be considered doubtful about a collectability offer.
The IRS will consider a settlement that is based on this formula:
Settlement Amount = Monthly disposable income x number of months + net realizable equity in taxpayer’s assets.
Disposable income refers to monthly income less any monthly expenses. The IRS may not allow taxpayers to pay all expenses. Commonly disallowed expenses include college tuition payments for a dependent, and credit card payments (disallowed because they are unsecured debt).
Example 1 Your monthly gross income is $5,000. Your household expenses total $4,500. 5,000 – 4,500 = 500. Your Collectability is $500 Multiply your Collectability with 12. 500 x 12 = 6, 000 Your Offer will be accepted by the IRS if it contains $6,000
Example 2 Your monthly gross income is $4250 Your household expenses total $4,500. 4,250 – 4,500 = -$250. Your Collectability is $0. Your Collectability is $0.
A taxpayer who believes that he or she is eligible for tax debt relief must complete a financial statement using a form provided to him by the Internal Revenue Service. For wage-earners, and self-employed persons, use Form 433A. For all other types of business offers, Form 433-B can be used. These financial statements show all asset equity and liabilities, as well as disposable income.
Effective Tax Administration
The ETA program was created as an alternative to the Doubt as to Collectability and Doubt As to Liability (DATC)Offer programs. These programs require either inability to fully pay the tax obligation (DATC), or a claim that the tax, penalties, and interest being assessed are incorrect (DATL).
In situations where fairness and equity would dictate, the IRS can accept a lesser amount than the reasonable collection possibility under the ETA Offer program.
The taxpayer must prove that tax collection would result in economic hardship or “where compelling public policy considerations or equity considerations” are sufficient to allow the taxpayer to accept less than the full amount.
To settle federal tax liabilities arising under the Internal Revenue Code, an Offer in Compromise may be submitted. This applies to both income and payroll taxes. Individual taxes (income, trust funds recovery penalties, etc.) are also included. You cannot settle taxes that have been already assessed. The Income Tax in the United States is assessed on the due date or, if the return was filed after the due date, the day it is received. The due date for income taxes in the United States is April 15. An Offer in Compromise cannot include a tax liability that has not been assessed. However, certain taxes are due at any time throughout the year and are eligible for inclusion.
Required Estimated Tax Payments
The IRS has made some changes to the Offer in Compromise program effective April 15, 2020. It now requires that a non-refundable, up-front payment of twenty percent plus $205 be submitted with the Offer of Compromise in case of a cash offer.
Two main payment options are available for an IRS Offer in Compromise (OIC).
- Lump-Sum Cash Offer
Lump-sum payments are made in five or fewer installment payments. All payments must be made within 5 months of the offer being accepted. You must include 20% of the offer and the application fee when you submit your application.
- Periodic payments
This is when you make monthly payments for a term less than 24 months, but more than five months. You must send the first monthly payment along with the application fee when you apply. You can continue making the monthly payments while you wait for the IRS’s response. If the IRS accepts your proposal, you can continue to make the monthly payments until the amount is paid in full. Failure to pay your payments will result in the rejection of your offer by the IRS. You have no appeal rights.
The IRS may reject an Offer without paying the fees. The IRS has two years from the date the Offer is received by it to make a decision. The Offer will be accepted automatically if the IRS does not decide within two years.
The Tax Increase Prevention and Reconciliation Act of 2006 (TIPRA 2005), allows taxpayers to choose to pay over time. The taxpayer must include the first month’s payments with the offer. The 20% is only applicable to lump-sum payments. The IRS will then consider the offer and the taxpayer must continue making monthly payments to keep the offer current. The offer will be rescinded if the taxpayer fails to pay the monthly payments.
A low-income taxpayer could be exempted from paying both the $186 application fees and the 20% down payment. To determine if these fees or payments are applicable, the taxpayer should consult Form 656A.
Leasing and levies have an impact
A tax lien will not be affected by an Offer in Compromise. The lien will continue to be in effect until the IRS accepts the offer and the entire amount has been paid. The IRS will remove the lien if the offer amount has been paid.
An offer in compromise will prevent tax levies under the US Federal Tax Regulations. This regulation says that the IRS won’t levy on taxpayer property while an offer in compromise (an offer accepted for processing) is pending. If rejected, it will remain in effect for thirty days. The IRS can’t levy on taxpayers’ property while they appeal the rejection. It is not possible to release a levy that is already in effect at the time of submission.
During the analysis phase of your tax resolution case, your tax consultant covers quite a bit ground in a relatively short period of time. With that in mind, here is a brief overview of the most frequently negotiated programs on behalf of our clients.
Preparing a package that gives the IRS every chance to accept your offer of compromise is key to making a successful offer in compromise. Do everything possible to resolve your offer in compromise at the level of an offer specialist.
Communicate with them and attempt to enter negotiations before they reject your offer. It is often easier to accept an offer before they reject it than to save it after a rejection letter has been sent.
It is important to not despair if an offer is turned down. You should carefully evaluate the offer to determine what you can do for it to be more appealing to the IRS. You can withdraw the offer or appeal it if necessary.
Accepting compromises can be difficult, but I believe these best practices will help you increase your chances of being accepted.
It is important to remember that it is better to have an experienced tax professionals like Ideal Tax representing you when dealing with the IRS. The average taxpayer doesn’t know everything about the IRS or how they work.
You have the best chance of getting your OIC approved if you prepare it and present it correctly. It is also a great advantage to have an advocate who can keep up with the IRS. Ideal Tax can help you with the IRS fresh start program by submitting an OIC to IRS if you have been rejected. We may be able to resolve your OIC issues and keep them from the appeals process. Contact us today for a free tax consultation.
Federal/State Tax Investigation
Oftentimes, your tax specialist will recommend a Federal and/or State Tax Investigation before presenting you with a complete resolution program. This is an invaluable tool used when faced with an uncertain surrounding your tax history. We can obtain all your records, transcripts, and supporting documents going back 10- years. Essentially, this gives us a blueprint on how to construct the most advantageous resolution program on your behalf.
Federal/State Tax Preparation
Installment Agreement (IA)
There are various types of installment agreements available to taxpayers. Several factors go into successfully negotiating our clients into an Installment Agreement such as income, amount of liability, and terms, just to name a few. We explore all Installment Agreements you qualify for and negotiate terms that put our client’s best interests ahead of the tax agencies.
Currently Non Collectible Status (CNC)
This has vastly become one of our more utilized resolution programs in light of the economic landscape of our country. This program is set aside for those individuals and/or families that are experiencing extreme economic hardship. Once we successfully negotiate you into this program, all payments and collection efforts are suspended for a term of 2 years. Please note, that there are very strict terms and conditions associated with this resolution. Your tax specialist will review these in detail when recommending this resolution.
If the IRS is consistent with one thing, they are consistent with the number of penalties, fees, the interest charged to the principal balance of your tax liabilities. Under certain guidelines and restrictions, we can motion for a penalty abatement which could reduce your penalty and fees by up to 40%. Please consult your tax consultant to see if you qualify.
Wage Garnishments and Bank Levy Holds
Wage Garnishments and/or bank levies are arguably the cruelest collection method utilized by both Federal and State Agencies. ITS staff members are sensitive to the negative impact these methods can have on a family and make them our number one priority. We can move for an immediate Garnishment and Levy hold to negotiate a successful resolution to your tax liabilities. With most bank levies, the withheld funds can be back into your account within 72 hours of the date the funds were withdrawn. Consult your Tax Specialist for the details of this program.
Ideal Tax Solution Representation