Reduce IRS Debt With an Offer in Compromise

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Staff Writer
October 29, 2018

  • If you cannot afford to pay your tax debt and are unlikely to be able to do so before the statute of limitations expires, the IRS may accept an offer in compromise.
  • This offer can be less than the full amount of past-due taxes but must represent the most the agency can realistically collect from you.
  • A tax professional can help you make an offer that is more likely to be accepted by the IRS.

Offer in compromise is an agreement with the IRS to allow an individual to settle tax debt for less than the full amount he or she owes. To qualify for an offer in compromise (OIC), you must generally demonstrate you are unable to pay the amount due and meet other requirements.

Offer in Compromise Eligibility

If the IRS determines you can afford to pay the tax liability, either as a lump sum or through an installment agreement, you are unlikely to be approved for an OIC. Even if you are able to prove you can’t pay your tax debt, you must meet these requirements to qualify:

  • All tax returns have been filed.
  • All estimated tax payments for the current year have been completed.
  • All required quarterly federal tax deposits have been completed (business owners who have employees only).

An OIC may be available in situations in which:

Reduce IRS Debt With an Offer in Compromise
  • Doubt exists as to the correct tax amount for which you are liable (this is rare).
  • The IRS is unlikely to be able to collect the full amount of the debt based on your existing assets and liabilities.
  • Requiring full payment of the liability would create an economic hardship or be inequitable or unfair because of certain special circumstances.

The decision to accept a taxpayer’s OIC is fully at the discretion of the IRS and is not governed by an existing legal right. However, the agency is legally required to give each offer fair consideration. According to data from the IRS, the IRS accepts about 40 percent of OICs in a given year. Before submitting an offer, you can use the prequalification tool the IRS provides.

Keep in mind, however, that prequalification is no guarantee your OIC will ultimately be accepted. You may want to consult a tax attorney to increase your likelihood of having your offer accepted. If you apply and are rejected, the detailed financial information you provide will be used to expedite collections activity.

If you are in the process of filing for bankruptcy, do not apply for an offer in compromise. Collection activities will cease during bankruptcy proceedings. Moreover, when your case is discharged, the court will decide how your tax debts will be repaid.

If the IRS has already referred your case to the Department of Justice, you are no longer eligible for an offer in compromise. When a tax debt reaches the status of legal judgment, the IRS is unable to accept a lower amount.

Audits and Innocent Spouse Relief

If the IRS is in the process of conducting an audit to determine the correct amount of your tax debt, or if you have applied for innocent spouse relief, refrain from requesting an offer in compromise until the IRS has made a final determination.

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Innocent spouse relief is an option for an individual who can prove that his or her spouse is entirely responsible for the tax debt in question. This can protect you if your spouse failed to claim income, claimed improper credits or deductions, or did not properly report income. If you have separated from your spouse, you can apply through the IRS to have your tax liability determined separately.

To qualify for innocent spouse relief, you must apply no more than two years after the tax in question is assessed. You must have filed a joint return in which your spouse’s misstatement or error was solely responsible for the tax underpayment amount and that you did not know about the underpayment when you signed the return. If you are applying for separation of liability, you must be either divorced, legally separated, widowed, or living apart for the entire 12-month period before you requested tax relief.

Amount of an Offer in Compromise

When considering an offer in compromise, the IRS will consider your reasonable collection potential (RCP). This accounts for the value of any assets you own, including vehicles, real estate, bank and investment accounts, and other property. It also calculates your anticipated future income, less projected allowable living expenses. Offers that are lower than your analyzed RCP will not be accepted by the IRS. If the IRS determines that you can afford an installment agreement and will eventually be able to pay back the debt, you will likely not be approved for an OIC.

When evaluating your expenses, the IRS will not include contributions made to charities, unsecured debt payments, and private school and college tuition.

When calculating the value of your assets, the IRS will use net realizable equity. This is defined as the amount they could receive for your assets in a fast sale, minus any amount subject to a secured lien from a creditor who holds priority over the tax lien. Applicable exemption amounts are also subtracted.

To calculate the value of your future income, the IRS looks at your last three months of pay stubs, your most recent tax return, or the profit and loss realized over the past six months. Professional representation from a tax attorney can be helpful if you need to prove to the IRS that these factors do not accurately reflect your earning potential for the future. For example, you may have lost your job recently or be preparing to retire.

If you receive a refund from the IRS in subsequent tax years, it will be applied to your past-due tax debt. This amount will not be counted toward your offer amount if you are in the process of applying for an offer in compromise.

Requesting an Offer in Compromise

If you are requesting an OIC because you are unable to pay or because doing so would cause undue hardship, you must complete and submit both IRS Form 656, Offer in Compromise, and Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals. If you own a business, you must also submit Form 433-B, Collection Information Statement for Businesses.

These documents required detailed financial information the IRS will use to determine whether to accept your OIC. You may also need to provide information about your spouse’s financial situation, even if he or she is not responsible for the tax liability in question. This is common if you live in a community property state.

If you and your spouse have both joint and separate tax debt, you will need to submit two separate Offer in Compromise forms. This is also the case if you are applying for an OIC for both your personal and business debts. In some cases, tax debt incurred by your limited liability company (LLC) can be included on your personal Form 656 only if the debt in question dates from before January 2009.

Make sure to provide comprehensive and accurate information on your Form 433. The IRS pays close attention to the figures you provide; it is much more difficult to get approved for an OIC than it is for an installment payment plan.

With these forms, you must submit the stated application fee (currently $186). This should not be combined with other tax payments. You do not have to pay the fee if you qualify for the low-income exception. This means your monthly income is at or below 250 percent of the federal poverty amount for your county established by the Department of Health and Human Services.

If you are requesting an OIC to dispute the tax liability, you must submit Form 656-L, Offer in Compromise (Doubt as to Liability). This form does not require an application fee. This avenue is difficult to prove and rarely used.

The IRS may not continue collection activity for the tax liability in question while your OIC is under review. However, they can still file a Notice of Federal Tax Lien, which places a lien against your property. This establishes the IRS as a priority creditor and notifies other creditors of the lien. During this period, the agency will likely request additional documentation, including but not limited to pay stubs, vehicle registrations, bank records, and much more.

Assets can be levied up to the time at which the offer in compromise has been signed by the IRS to acknowledge it as pending. If you already have an installment agreement with the IRS, payments will be suspended while the offer is under agency consideration.

If your offer is rejected and you choose to appeal, you can do so through the IRS Office of Appeals within 30 days of receiving the rejection. Collection activity will not be resumed until after the appeal process.

Your offer will be returned by the IRS if:

  • Required information is missing.
  • You have subsequently filed for bankruptcy.
  • You did not include a nonrefundable payment for a portion of the debt.
  • You did not include the application fee or combined it with other payments.
  • You are not up-to-date on current tax liabilities.
  • You have not filed all required tax returns.

If your offer is returned, you may resubmit it once the issue is resolved.

Offer in Compromise Payment Options

Your OIC can be in the form of either a lump sum payment or installments. The first option, known by the IRS as a lump sum cash offer, must be completely paid within less than five months in no more than five installments. If you choose this option, your Form 656 must be submitted with a payment of at least 20 percent of the amount of your offer. This payment will be applied to your tax debt, even if your OIC is rejected. However, you can specify the exact liability to which it will be applied.

You can also make an installment offer, known as a periodic payment offer, which consists of at least six monthly payments completely paid off within two years of the offer acceptance. With this option, your offer must include the first proposed payment amount, which will be applied to your tax debt and is not refundable. You must continue making monthly payments as indicated in your offer until the offer is accepted. However, if you meet the low-income certification guidelines as described above, you do not need to make these payments while your offer is under consideration.

If your offer in compromise is accepted, you must file and pay all other tax returns on time for the next five years. If you fail to do so, your offer may be returned and the tax debt in question reinstated.

Certain information about your offer in compromise may be publicly available for review at IRS Area Offices.

Rights When Dealing With the IRS

Taxpayers possess certain rights when dealing with the IRS, outlined in the agency’s Taxpayer Bill of Rights. It’s important for you to be aware of your rights as a taxpaying citizen, which include:

  • The right to be promptly informed about what you must do to comply with the tax laws, including a thorough explanation of IRS decisions about your tax account and the outcomes of these decisions.
  • The right to professional services, including polite, efficient, and high-quality assistance, and the right to speak to a supervisor when treated with discourtesy.
  • The right to have the amount of tax you owe calculated correctly and to pay only the amount du∂e, along with assessed interest and penalties.
  • The right to respond to IRS actions with additional information and evidence to support your objections.
  • The right to appeal decisions you disagree with in a public forum, up to and including the U.S. tax court.
  • The right to understand the maximum amount of time the IRS has to collect a tax debt and the maximum amount of time you have to challenge or appeal the agency’s position.
  • The right to due process during IRS investigations, including law enforcement actions that are no more intrusive than necessary.
  • The right to keep your private information kept confidential by the IRS.
  • The right to have representation during tax proceedings.
  • The right to a fair and just tax system.

If you have tax debt you can’t pay and need help with an offer in compromise, get in touch with Solvable today. Call us at 855-324-1775 for a free, no-obligation confrontation, or answer a few simple questions online to get started.

 

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