Tax settlement is a possibility if you owe more than you can afford to pay in back taxes. The IRS will consider whether paying your taxes would create a financial hardship by reviewing documentation about the value of your assets, your income and projected future income, expenses, and ability to pay. Your offer will be accepted if it represents your reasonable collection potential (RCP). This is the highest amount the IRS can reasonably expect to collect over several years. You may want to consult a tax professional who can help you determine if you qualify.
To qualify for an offer in compromise, you must not currently have an open bankruptcy proceeding. All your tax returns must be filed, and you should be current on any other required tax payments. You can use the IRS online prequalification tool to get started with your offer in compromise. This tool allows you to create an initial offer.
Many daytime television commercials promise to wipe out your back taxes for thousands less than you owe. The truth is, however, that the IRS rarely grants offer in compromise arrangements. In 2017, only 25,000 of the 16 million taxpayers who owed money to the IRS were successfully approved for a settlement offer.
The IRS requires you to prove that they will be unable to collect the full tax balance from you before the statute of limitations on the amount due expires. The statute of limitations on federal back taxes is 10 years. However, the clock stops ticking when you apply for an offer in compromise. It’s important that you avoid signing documents that waive your statute of limitations.
In general, the IRS considers your reasonable collection potential. This amount includes the value of your assets, including real estate, savings, and investment accounts, and other property. It also includes the amount left over each month after your allowable expenses are covered. The IRS has established guidelines for reasonable living expenses and how assets are valued and sold.
For example, if you have $25,000 of equity in your home but limited monthly income, your offer amount should be at least $25,000. If you do not have assets but expect to earn disposable income of $500 each month for the next 10 years, your offer amount must be at least $60,000. If your back tax amount is less than your reasonable collection potential, an offer in compromise does not make sense for you.
IRS Form 656-B, the Offer in Compromise booklet, provides the information and forms you need to apply for an offer in compromise. This includes Form 433 to document your income and assets as well as Form 656 for each business you own.
When you submit your offer, you need to include a non-refundable $186 application fee. Each Form 656 requires you to make your first proposed payment on the offer. These payments and fees can be waived for individuals who earn less than 250% of the federal poverty threshold.
The offer must indicate whether you plan to make periodic payments toward your offer or pay the entire amount in cash. For the latter option, you must make an initial payment of 20 percent of the offer amount. For example, if your offer is $10,000, your application must include a payment of $2,000. The remaining amount must be made in no more than five payments. In the example above, you would need to make five additional payments of $1,600.
Periodic payments must include the first proposed monthly payment. Continue to make this payment each month until you receive word about whether your offer has been accepted.
You will need to make monthly payments as scheduled. You can apply these payments to a specific year or amount owed. You may receive a Notice of Federal Tax Lien. This is a public record and gives the IRS a legal claim to your property. The lien will remain in effect until you satisfy the complete terms of the offer in compromise.
However, other collections activities will cease. The IRS will not move forward with seizing your assets while the offer is under review.
If you have an existing installment agreement, you do not need to make those payments while the offer in compromise is under consideration. You should only make proposed payments toward your settlement offer.
The IRS can take months or even years to review your financial information and accept or deny an offer in compromise. If you have not received word of approval or denial within two years, the offer has been approved automatically.
If the IRS accepts your offer, you must make all required payments and file all future tax returns. You must also meet all the established terms of your offer. If you fail to meet these requirements, your offer agreement may be void.
If you receive a tax refund in subsequent years, it will be added to the offer in compromise amount, not counted toward the offer.
If the IRS does not accept your offer, you have the right to appeal their decision. You must file Form 13711, Request for Appeal of Offer in Compromise, within 30 days of receiving the denial notice.
If you do not qualify for an offer in compromise, you may be able to resolve your back taxes with an installment agreement. Some taxpayers can qualify for currently not collectible status, which means that paying your back taxes would cause undue financial hardship.
If you need a tax professional who can assist you with an offer in compromise, visit Solvable today. We can match you with a well-reviewed company that has experience helping other taxpayers in your situation. Get on the path to resolving your back taxes.