IRS Offer In Compromise
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What is an Offer in Compromise?
In an Offer in Compromise (OIC), a taxpayer and the Internal Revenue Service agree to settle the taxpayer's tax liabilities for less than the full debt amount. The IRS agrees to OICs only in cases with exceptional circumstances and when they believe that the taxpayer should not or cannot pay the full debt amount, either in a lump sum or through a payment agreement. The IRS is very unlikely to consider an OIC unless the taxpayer has already explored other options, such as an installment plan to pay the full IRS tax owed over time, and found them to be unworkable.
In considering an Offer in Compromise, the IRS evaluates the taxpayer's ability to pay in terms of the taxpayer's current and anticipated income, real property, automobiles, bank accounts, and other property with equity.
Can an Offer in Compromise really help settle my IRS tax debt for almost nothing?
Taxpayers should beware of tax-preparers who actively promote filing for an OIC via such claims, as the IRS has determined that many of these promotions promise the taxpayer much more than the tax-preparers can actually deliver. In plain terms, while it may be true that an Offer in Compromise provides the power to settle your IRS tax debt for a small fraction of what you owe, it is also true that most people who owe an IRS debt will not qualify for a deep tax settlement through an IRS Offer in Compromise.
Under what circumstances will the IRS agree to an OIC?
Broadly speaking, the IRS will agree to an Offer in Compromise for one of three reasons: when there is doubt regarding the tax debt's collectability, when there is doubt regarding the tax debt's accuracy, and for purposes of effective tax administration.
Doubt regarding collectability: If, for example, a taxpayer has $30,000 in unpaid tax liabilities, is currently earning barely enough to meet living expenses, and has no real property, the IRS may conclude that the taxpayer cannot pay the full amount in either a lump sum or monthly installments. When examining doubt regarding collectability to grant an Offer in Compromise the IRS looks at the taxpayer's ability to pay the debt over a five year to ten year period of time.
Doubt regarding accuracy of the liability: If, for example, a taxpayer can document that the IRS's calculation of his or her tax liability is in error or doubt, the IRS may consider accepting a payment smaller than what they had originally determined as due.
Effective Tax Administration: If, for example, a taxpayer acknowledges the accuracy of her or his tax liability and has the means to pay it in full, but has an exceptional responsibility such as the care of a seriously ill dependent, the IRS may agree to settle the tax liability for less than its full amount. The IRS uses terms such as "economic hardship" and "unfair and inequitable" in describing such exceptional circumstances.
The IRS defines "economic hardship" as when a taxpayer cannot pay reasonable basic living expenses. This, of course, begs the definition of "reasonable basic living expenses", but such living expenses certainly do not include the maintenance of an affluent or luxurious standard of living. Factors that the IRS may consider regarding an economic hardship determination include a long-term illness or disability that either prevents the taxpayer from earning a living or is about to exhaust the taxpayer's financial resources, a set monthly income that is insufficient to provide for the taxpayer and his or her dependents, and the inability of the taxpayer to borrow against the equity in his or her assets.
Do I need to owe some sort of minimum IRS tax debt to look at an OIC?
Because of the time involved and transaction costs of an Offer in Compromise, especially if you
Am I more likely to be granted an Offer in Compromise for a huge IRS tax debt?
In general, taxpayers with especially large tax debt owed for several years may find it difficult to get relief through an Offer in Compromise. People with the income or assets to pay a larger portion of their IRS tax debt may find that with large sums of older taxes Offer In Compromise rules leave the taxpayer in a position where the calculated monthly tax repayment figure exceeds what they can afford because of the time limitation placed on OIC tax debt plans. They may, however, find it advantageous to apply for a program the IRS calls a "part pay" installment agreement. The main factor with any Offer in Compromise revolves around the taxpayers ability to pay the IRS tax debt, not the gross dollar figure of the taxes owed.
What kind of IRS taxes can be settled with an Offer in Compromise?
Regular personal income taxes as you would report on your annual 1040 IRS tax return, 941 business taxes and trust fund portion taxes withheld from employees.
Why would the IRS look at any settlement of tax debt?
It works very much like the settlement of credit card debt or the mortgage loan modification process, if the lender feels they may get zero otherwise, for example in a case where credit card debt gets wiped out to nothing in a chapter 7 liquidation bankruptcy, the creditor, in this case the IRS, would rather get something than nothing.
How do I file for an OIC?
Taxpayers filing for an OIC must complete the appropriate Form 646, pay the filing fee ($150 as of this writing), and make an initial payment. In rare cases, such as for impoverished individuals or when the taxpayer is filing the OIC solely on the basis of doubt regarding the accuracy of the liability, the IRS may waive the filing fee.
Who approves the Offer In Compromise, the IRS or a judge?
As an Offer in Compromise is an agreement between a taxpayer and the Internal Revenue Service, the decision to accept an Offer in Compromise lies with the IRS.
Is there an appeal process if my Offer in Compromise gets denied?
The IRS has established an appeals process for taxpayers whose Offer in Compromise they have rejected.
How long does the Offer In Compromise process take from start to finish?
Generally speaking, the time from when you begin preparing to apply for an Offer in Compromise to making your first monthly payments is one to two years. You should plan on taking one to four months to prepare the forms and backup documentation, 12 to 18 months for the IRS to process your Offer, and one to three months to finalize your Offer. Depending on the complexity of your Offer, the time may be shorter or longer than described here.
What are my options paying off an OIC?
Taxpayers have three options in paying off an OIC: a lump sum cash offer, a short-term periodic payment offer, and a deferred periodic payment offer.
Lump sum cash offer: Ironically, a taxpayer can use this option to pay his or her liability in installments that could be spread out over more than two years. The number of installments, however, must be five or fewer.
Short-term periodic payment offer: This option requires a taxpayer to settle the liability within 24 months of the OIC filing date and to make payments while the IRS investigates the OIC. A taxpayer should calculate the offer in terms of the realizable value of her or his assets plus the total amount the IRS could collect over 60 months of payments or the remainder of the statutory period for collection, whichever is less.
Deferred periodic payment offer: This option requires a taxpayer to settle the liability within the remaining statutory period for collecting the tax and to make payments while the IRS investigates the OIC. A taxpayer should calculate the offer in terms of the realizable value of her or his assets plus the total amount the IRS could collect through monthly payments during the remaining statutory period for collection.
Do I need an attorney to apply for an OIC?
While private individuals may apply for an Offer in Compromise, tax attorneys can provide valuable advice that may help you save you money over the course of the plan. Offer in Compromise negotiations tend to be complicated and those without a fair amount for financial experience should likely not even think of a do it yourself approach. Even those with some tax experience may find the old adage that "the lawyer who represents himself has a fool for a client" proves true for OIC cases.
How does an OIC affect a tax lien?
If the IRS has recorded a Notice of Federal Tax Lien on the taxpayer before agreeing to the taxpayer's OIC, they will not release the lien until the liability is settled either outright or under the terms of the Offer in Compromise. Taxpayers should realize that filing an OIC does not necessarily prevent the IRS from recording a Notice of Federal Tax Lien. You can also figure that if the IRS controls a Federal Tax Lien on property where the equity in the property far exceeds the value of the lien, that the IRS will not easily move toward any OIC. Imagine someone with $30,000 of IRS tax debt where the IRS put a lien on their house, a $300,000 property with no mortgage. Regardless of the person's income, the equity in the house and the fact that the IRS tax debt is fully secured means the incentive for the IRS to accept an Offer in Compromise starts at a very low level.
How does an OIC affect tax refunds?
Unless a taxpayer filed an OIC on the basis of doubt regarding accuracy of the liability, the IRS will not return any refund and/or interest due because of a tax overpayment or other liability for the calendar year in which the IRS accepts the OIC. It will rather apply the refund and/or interest due toward the tax liability.
How does an OIC affect a tax levy?
Subsequent to filing an OIC, taxpayers cannot recover any levy, payment made or applied to the original tax liability.
What are the downsides of filing an Offer in Compromise if the IRS rejects you?
If the IRS rejects your Offer in Compromise, it is likely to use the very extensive amount of personal financial information you provide them to accelerate their collection efforts against you. In other words, you are better off not applying for an OIC if the IRS is unlikely to accept it.
How is your personal credit affected by an OIC?
The IRS does not disclose information regarding Offers in Compromise to credit agencies. If you apply for an Offer in Compromise, the IRS accepts it, and you pay it off, the IRS should release any tax lien against you connected to the OIC. After that, you should verify with the credit companies that the released lien is reflected on your credit report.
Are there limits to requesting another OIC if you did an OIC in the past?
If you filed for an Offer in Compromise in the past, regardless of whether the IRS accepted it, you can apply for another one if you again find yourself in a bind regarding back taxes. Keep in mind, however, that the IRS considers an Offer in Compliance a forgiveness of past debt in return for future compliance. If you come back to the IRS requesting a second (or even a third, or a fourth) Offer in Compromise, you should expect the IRS to view your case more skeptically than they did previously.
Do the states have a process similar to an OIC for state taxes?
Several states, including New York, Utah, and West Virginia have Offer in Compromise programs for individuals with tax debt. Contact your state revenue department or a tax professional to determine whether your state offers such a program.
I have IRS tax debt, credit card debt and a foreclosure pending, what do I do first?
How you end up solving a case where you want to avoid foreclosure, get credit card debt relief and settle your IRS tax debt depends on the size of each debt and the state of the legal process for each, but for someone in this situation the first thing to do stands as an easy answer – Call a Lawyer! Seriously, never attempt so solve a complicated debt situation with a do it yourself solution.