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It can happen to anyone, and in fact, it happens to thousands of people every year. Tax time comes along, you file as you’re supposed to, and the shocker comes when you discover you’re thousands of dollars underwater. You don’t know how you can possibly pay, and you don’t want to find out the consequences of not paying. What can a person do?
One of the lesser-known but more attractive options is one that allows the taxpayer to meet their obligations by paying less than the total amount owed. This program is called the IRS Offer in Compromise. This article will provide IRS Offer in Compromise tips and tricks by examining the in-depth process by which you can apply for, and succeed at making use of, the IRS OIC program.
The Offer in Compromise program,allows a taxpayer in IRS debt to settle their responsibility for lower than the total owed amount. The program is in place to help those people who will never be able to pay off their full debt before it can be collected by the IRS, which usually amounts to a ten-year period.
Not everyone qualifies for the Offer in Compromise IRS program. This is because it’s designed to be used by those who will not be able to pay their full owed taxes. The IRS feels that the majority of people have the means to do so, through a payment plan or by liquidating current assets. Those who cannot prove their inability to pay off the full amount owed cannot qualify for the Offer in Compromise. Instead, the IRS is willing to work with such folks to establish a monthly payment plan to cover all debts.
There are several varieties of Offer in Compromise IRS program. The one most commonly sought is known as the Offer in Compromise, Doubt as to Collectability, or OIC-DATC, program, wherein you are simply unable to pay your taxes and you can prove it. A second is a Doubt as to Liability program, where you challenge the amount the IRS says that you owe. Finally, there is the Effective Tax Administration, where you can demonstrate that while you can pay the taxes, doing so would subject you to undue hardship. It’s important to know which one to apply for, so you can have a successful application.
OIC-DATC, as stated above, stands for “Offer in Compromise, Doubt as to Collectibility.” This designation means that you can demonstrate that even through liquidating your assets or choosing a monthly payment plan, you cannot pay the taxes you owe.
To take advantage of this program, you will need to file a Form 656 Offer in Compromise as well as the appropriate form to attach financial statements (Form 433A-OIC if you are an individual, or IRS offer in compromise Form 433B-OIC if you are a business). You then need to submit any supporting documentation you have that can demonstrate your current status renders you unable to pay the taxes due.
The Doubt as to Liability program exists for those who believe that they should not be liable for the taxes that are rendered due. If you have a tax bill and you think you’ve either paid it, it is incorrect, or that there is some other reason why you shouldn’t be required to pay, the Doubt as to Liability program applies. In order to file this claim, you will have to supply evidence proving that you aren’t liable. This can include documentation that you’ve already paid, evidence that you are exempt from taxes, or other paperwork demonstrating the taxes should not have been levied.
This program is for a very small subset of people. It’s available to those who may be able to pay off the owed tax amount, but if they do, they would suffer undue hardship. For example, it may require you to sell a car, or leave you with little money to pay utilities or for food. If you fall into this category and you can demonstrate the hardship you would suffer, Effective Tax Administration may be applicable. It also exists for those who should nominally be able to pay the taxes, but who face extenuating circumstances that interfere with their ability to pay.
If you cannot pay your taxes and you meet one of the above qualifications, you may be able to apply for an IRS Offer in Compromise program. Let’s check out a complete step-by-step guide to making the IRS Offer in Compromise program work for you, to relieve your financial burden and get you above water once again.
Before undertaking an application for this program, you must understand the kind of Offer in Compromise for which you need to file: DATC, Doubt as to Liability, or Effective Tax Administration. When you have determined which program applies to you, there are seven steps you can take to ensure you find success with your application and use of the IRS Offer in Compromise program.
The first step, before filing any applications at all, is to make sure you are current with your tax payments. File all of your tax returns and be sure you don’t owe any back taxes. You must also stay current with your ongoing taxes. If you end up owing any tax at all for the next five years, your Offer in Compromise can be canceled and you can find yourself back at square one. This is the most important consideration for success with the IRS Offer in Compromise program — get and stay current with your tax filing and payments.
Look closely at your existing tax bills and penalties levied. Are these all proper? You might be surprised at how often mistakes creep into tax bills. If there are any penalties or taxes you find that can be legitimately challenged, you might consider doing so, to reduce or even eliminate the total you owe. This may lead to you being able to file for a Doubt as to Liability option. Still, don’t go overboard; make sure that anything you contest is a legitimate error and should be contested. You never want to try and claim you don’t owe something which you do owe.
If you can demonstrate that you’ve looked into payment options before filing for an Offer in Compromise, it may reflect well that you’ve tried to pay what you owe. Hear the various payment options offered and examine them closely, but do not try to negotiate. The IRS doesn’t generally negotiate. Simply accept the options offered and review them to see if any of them make sense for you without creating an undue hardship.
Next, look closely at the payment options offered. Analyze whether you can actually pay the required amount. If you can pay the bill, even if it might require selling off some assets, the IRS will expect you to do so. You must be able to demonstrate that liquidating assets or making the offered payments is either not possible for you, or that doing so would create undue hardship if you are going to file for an OIC-DATC or Effective Tax Administration program. If you believe that this is the case, you may want to start gathering documents.
There is a down payment required to apply for the IRS Offer in Compromise program, so be prepared to have these ready to go. In some, but not all, cases, there may be an application fee that can be around $186, but if you meet certain low-income certification guidelines the fee may be waived. For many, you will not need to pay such a fee.
You must then choose whether to make a lump sum cash offer, which requires you to pay 20% of the revised amount upfront, with the rest paid in a maximum of five installments over the next two years, or a six-payment plan over two years. These payments are required to begin immediately when you submit your forms, and you have to keep making them even as the IRS considers the offer, which can take up to two years. If the IRS doesn’t respond within two years, your offer is considered automatically accepted.
An Offer in Compromise application is almost never granted without question. You will need to provide extensive documentation to prove that you qualify for the program for which you are applying. The specific documents you will need to provide can vary widely from person to person but will include detailed financial records showing how and why an extra payment on the level of that required to cover your taxes either cannot be made or would cause undue hardship. Credit statements, bank records, utility payments, accounting of assets, and other documents may be required.
You will be subject to an IRS investigation. This can last anywhere from several months up to the full two years of your offered settlement amount. Be prepared to go through this investigation, which can be very in-depth. The more paperwork you have and evidence you can gather to back up your claim, the better off you will be.
You may want to consider speaking with a tax attorney to help with the process. A qualified tax legal professional can help you to navigate the complications of the application process, advise you on the documentation you need, and help with your direct communications with the IRS. This can often provide the most favorable outcome. They can also show you the forms you need and walk you through the application, step by step.
The IRS will send you a written decision in the mail regarding the results of your Offer in Compromise investigation. It’s not at all unusual for the letter to be a rejection, and it will include a rejection notification, the reason why you were rejected, and a notice that you have the right to file an appeal. Be prepared to do so right from the start, as the window can be tight.
Before you apply, understand that the IRS will not accept a settlement offer if, upon investigation, they feel that you can afford to pay what you owe. In such a situation, you must explore other options, such as offered payment plans from the IRS. Make sure that you follow the steps above, particularly those involved with getting current on your tax returns and making your initial and subsequent offered payments.
It’s also worth knowing that these offered payments which are made during the investigation process are applied to your owed tax, so even if your offer is rejected, your owed taxes will be reduced by an amount equal to the payments you’ve made. While there is no set IRS Offer in Compromise formula, those who experience Offer in Compromise success stories are those who are the most prepared.
You may actually need to call the IRS to initiate the process for an Offer in Compromise. While many people are terrified at the prospect of speaking to the IRS on the phone, in truth such a call can actually help you to decide on the best possible course of action for your debt. If you’re too nervous to make the call, your tax attorney can do it for you.
If you do attempt to call yourself, it can help to check out a script of what to say that will help you to prepare by knowing what to expect. Every conversation is unique, but most follow a fairly typical process and being prepared in advance for the questions you will be asked can keep you relaxed and make the call go much more smoothly.
Before you call, gather your social security number, individual tax identification number, or federal employer identification number if you’re a business. Have your IRS notice or tax bill handy, as well as the tax return that generated the bill. It’s also a good idea to gather records and totals for your income and expenses on a monthly basis. You’ll need to provide the notice number found on the IRS tax notice.
Know what you can afford to pay, and expect the agent to advise you on other methods, including payment plans, liquidating assets, taking out loans, and other options. Make sure yet again that all of your tax returns have been filed. This cannot be overstated. Finally, if you haven’t used the Offer in Compromise calculator above, do so before you call. This will provide important information you can use to back up your claim.
Remember that you can only include expenses that are directly involved with your household. That means things like streaming services, cable TV, and the like are not allowed. It’s okay if you’re not sure what is allowed, so ask the agent on the call what expenses you can include.
The most important thing to remember while on the call is to just stay calm and don’t be nervous. Making this call is not going to hurt your chances in any way. At worst, you’ll discover you don’t qualify and at best, you’ll gather vital information that can help you with your application. The agent on the other side is a tax collector, but they also want to get whatever they can, so they are actually there to help you.
They will ask if you’re calling to pay the tax bill and if you’re able to pay any part of it. It’s perfectly okay to say that you can’t pay right now, and you should say that if you are asking for an Offer in Compromise. At this point, they will interview you about your finances, your assets, your expenses, and your income. The questions they ask may be quite detailed.
During this interview process, answer the agent’s inquiries politely and honestly, but don’t feel like you have to volunteer additional information or make excuses. Be straightforward and stick to the facts. If you’ve prepared your information and gone through the prequalification calculator, there’s no reason to be concerned or nervous.
As you discuss options, the agent will probably make a suggestion for an Offer in Compromise for five months of payments. If you can afford that, it may be best to accept this offer. If you really can’t, it’s okay to say that you can only afford a certain amount per month. The agent will then make a counteroffer which you can accept, and so forth. The agent will then walk you through the steps to file your Offer in Compromise forms.
The agent will likely suggest that you borrow money to pay off your debt. It’s okay to simply say that this isn’t feasible. It’s generally not a good idea to borrow money to pay off a debt. A credit card will replace your tax debt with high-interest debt that you may never pay off. A home equity line of credit will put you underwater with your house payments. None of that is a good idea. It’s rarely wise to borrow against an existing debt.
You should legitimately look into whether or not liquidating investments is a valid means by which you can pay off your debts. If you can do this without creating an undue hardship on yourself, the IRS will expect you to do so, and it will likely come out that these assets can be liquidated during the investigation. Be sure while gathering your evidence that even if you liquidate what you reasonably can, you still are unable to make your payment.
Other options for payment include an installment payment agreement, which may be offered if you owe less than $50,000 in taxes, a partial payment agreement made in monthly installments, or filing for bankruptcy. The IRS will never recommend this, but if you truly are in a bad way and cannot pay your debts with any of these options, bankruptcy can wipe out your debt. You will need an attorney to file for bankruptcy, but if you specifically request it, the agent on the call can educate you on the steps you need to take.
Very rarely, the IRS can list a tax status as “not currently collectible.” If you are in this status, it simply means they acknowledge that you’re simply not able to pay any amount of your taxes at all. They may come back at a later date if your finances change to demand payment, but your debt and liens can be put on hold for a while in this manner if you simply can’t make payments.
So what do you do if the IRS accepts your Offer in Compromise? If they review your finances, and upon investigation conclude that you are correct that paying the taxes would bring you undue hardship or is impossible over a 10-year period, they will send you a written notification, which will include the offer conditions, the date it was accepted, and where you should send your payments. You will then have 30 days from the date postmarked on the notice to make your first payment. When the IRS gets the payment, they’ll release your lien, but you have to make your ensuing payments on time or the offer can be canceled.
You will be given 30 days from the postmark on the letter to file your appeal. This is why it’s a good idea to get your appeal ready immediately — if you don’t need it then it’s no harm, no foul, but if you do, you want to be ready to send it off quickly. Letters can get hung up in the mail, meaning the post date on the letter could show you have precious little time to move.
There are several situations under which you cannot file an appeal. If your offer was rejected for any of these reasons, you cannot appeal:
If your offer is rejected because the offer is too low, which is why many Offer in Compromise applications are refused, the rejection letter will state an acceptable amount. You can request a copy of the report listing the factors involved in your rejection. If the IRS refuses this report, you can file a Freedom of Information Act request.
When you understand the reason for your rejection, you can resubmit the offer, accounting for these factors. A revenue officer from the IRS may be able to help you with tendering an acceptable offer. If you submit within a month, you don’t have to resubmit a new Form 656 unless you’re submitting a significantly different offer. The form for an appeal is IRS Form 13711.
In order for your appeal to be seriously considered, you must be sure that you have furnished all the information that the IRS asks for, that your tax returns are up to date, and you are current for present year tax payments (including estimated quarterly payments for self-employed people).
If you are looking at filing an appeal for an Offer in Compromise, it may be a good idea to secure a qualified tax attorney’s help. These appeals must go through the Court of Appeals, so they require specialized legal knowledge. At Solvable, we are here to help streamline the process of filing an Offer in Compromise, and making the experience less of a burden on you. If you need help to navigate the tax code, gather your information, and find success in filing your IRS Offer in Compromise form, be sure to get in touch with us to be matched up with a top-rated Solvable tax partner today.
Jill writes for Solvable covering financial freedom through debt resolution.