The Offer In Compromise and Other Tax Settlement Options for Your Tax Debt
We hear from several people requesting will the IRS settle my debt. For example, one client asked us if I owe $50,000 will the IRS settle for $5,000. The question highlights the Offer in Compromise program that most people have heard of. The fact is that Offer In Compromise qualification is based upon a calculation of the ability of the taxpayer to pay his or her tax debt prior to the collection statute expiration date, which is the deadline beyond which the IRS can collect the debt.
Public perception, to the contrary, the IRS’s decision is not largely subjective; it is, instead, based on computational formulas. The best candidates for the Offer in Compromise have minimum assets and little to none disposable income. However, even if you aren’t eligible for the Offer In Compromise you can settle your tax debts through other IRS Programs such as: Partial Payment Installment Agreement, Currently Non Collectible and Abatement of Penalties.
Types Of Offer In Compromises
Doubt as to collectability
This means that there is doubt that the tax, interest and penalties will be collected anytime in the foreseeable future through the IRS collection process. The IRS looks into the answers to three questions when considering this possibility:
(1) Is it likely that more could be collected through force than if the IRS were to accept the OIC?
The IRS operates just like a business, which means that for them to choose one path rather than another — in this case, accepting the OIC rather than using force to collect what is owed — they need to be convinced that such an alternative path would save them money.
(2) Would it be feasible to give the financial situation for the taxpayer time to improve somewhat and then make an attempt to collect taxes from him or her?
(3) Would anyone look at the offer as improper if it were to be accepted?
Doubt as to liability
This means there is doubt that the taxpayer’s tax liability is actually accurate. There are several reasons why such can be the case. Sometimes, the person responsible for examining your tax liability interprets the tax code incorrectly. He or she may also fail to use all of the evidence and support that was presented to him by the taxpayer, or the latter may have come up with new support or documentation that proves the tax amount to which he was assessed to be incorrect.
Effective tax administration
This is when there is no doubt that the taxpayer owes as much as the IRS says he does, but in this particular case, certain circumstances exist, such that it would cause financial hardship or otherwise be unfair and inequitable treatment to the taxpayer if the IRS were to collect those taxes.
We will discuss Doubt of Collectability OIC in the duration of this article and the qualifications, fees and processes in getting your tax settlement accepted.
Basic qualifications of Offer in Compromise
In order to compromise one’s taxes with the IRS, one has to meet a certain set of requirements. Basically, one has to prove that he or she is unable to pay the full balance that was owed before the statute expires, using approx. 80 percent on total assets plus any disposable income using allowable expenses. The IRS will calculate your future income by multiplying your disposable income by twelve or twenty-four months based of how you will pay your tax settlement offer.
The taxpayer who meets any of the three criteria mentioned in the preceding subsection stands a reasonably good chance of being eligible to receive an offer for a compromise settlement. However, there are some additional requirements that one needs in order to qualify for an OIC. Among them are that the taxpayer must:
• Not in currently in bankruptcy proceedings
• Taxpayer in in full compliance and all tax returns filed
• For business taxpayers they must filed payroll tax returns for both prior quarters.
• pay a $186 OIC fee for the request to be processed
• Properly filled out all required forms plus supporting documents
In addition, only taxes that have already been assessed can be settled via OIC. There is considerable misperception regarding the specific figures that can be used to calculate value of assets and monthly future income. However one thing is clear the IRS uses an objective formula to review your potential tax offer.
For example say Laura owes $100,000 in taxes she discusses her case with a license professional and agrees to submit and Offer In Compromise application. She has a total net assets of $8,000 and disposable income of $500. She will borrow from friends and family to pay the offer in a lump sum. Therefore, she will choose 12 months to calculate her future income.
Assets = $8,000
Future income $500 * 12 = $6,000
Her offer would be: $14,000
Therefore, her offer would be $14,000 as a settlement to pay back taxes of $100,000.
A deposit must be made at the time that an OIC is submitted. The amount to be paid for an OIC will vary, depending on the income — both present and future — of the person applying for one, as well as on his or her assets and liabilities, but normally 20 percent is offered for a “lump sum”.
Current IRS guidelines allow for this lump sum to be paid in a number of installments over a period of as long as two years. For a periodic payment OIC, you must make subsequent proposed installment payments as they fall due. Should the OIC be rejected, withdrawn or returned, the IRS will keep any deposits and payments made and apply them to your tax debts.
When calculating the offer amount, one must conduct due diligence completely. When making their initial calculations, taxpayers often find the offer amount to be too high for OIC to be a viable option for them. In addition, during the IRS’s OIC investigation process, you may find out that you have computed your assets valuation and future income incorrectly, with the result that the offer amount is much larger than expected and too much to pay to settle the taxes owed.
Processing of Your Offer
It can take up to a year to negotiate the OIC process from beginning to end. During this period, the IRS will not demand payment on any taxes that you may owe from previous fiscal periods; however, the payer is required to pay all of his or her current taxes as they become due, and that includes any quarterly estimated income tax payments and federal tax deposits. Failure to do so will result in immediate rejection of that payer’s OIC by the IRS, with no possibility of appeals. The IRS may also proceed against the taxpayer immediately to collect the entire amount of the original tax liability with interest on the unpaid balance accruing from the date of default.
An accepted OIC may also be revoked if the IRS determined that you have falsified or concealed some of your assets or that there has been a mutual mistake of a material fact great enough to result in a contract being reformed or set aside. Furthermore, the deposit made by the taxpayer, as mentioned in the previous section, will be applied to his taxes, and an additional request is required for the individual who wishes to make a new OIC. In the event that your OIC is accepted, a record of the amount of taxes due, and the amount accepted, will be available for public inspection for a year at the local IRS office.
The fact that you have submitted an OIC at all will add a year, plus however much time the IRS is taking to consider your OIC, to the length of time that the IRS has to collect overdue taxes from you. During that time, however, interest and penalties will continue to accrue on the outstanding balance due. The IRS will keep any refunds that are owed to you for tax years before the end of the calendar year during which the OIC is accepted. The moment that the IRS accepts your OIC, you give up any and all rights to dispute the correctness of the taxes for any of the years that have been compromised.
Just because you qualify for an OIC does not mean that you will obtain one; you need to be able to pay the offer amount, as stated above. There are two primary reasons why OICs are not accepted: either the taxpayer does not qualify for one, or he or she does cannot pay the amount that has been offered by not making timely payments. Although rare the IRS may require you, as a condition of accepting your OIC, to sign an agreement under which you would pay a certain percentage of your future income as part of the tax settlement offer. The total amount of these payments will never exceed your actual liability.
Beside the Offer In Compromise there are potential other options for you to settle your tax debt including Partial Payment Installment Agreement, Currently Non Collectible and Abatement of Penalties.
Partial Payment Installment Agreement
This agreement allows taxpayers to pay a smaller monthly payment than what is required in a regular installment agreement. In most cases, the amount is based on the taxpayer’s financial situation or disposable income. Typically, the payment amount doesn’t pay off the tax debt in full before the statute of limitations or Collection Statute Expiration Date (CSED) expires. On the expiration date, any taxes that haven’t been paid back are wiped away, meaning the taxpayer isn’t responsible for them.
Currently Non Collectible
Currently non-collectable status occurs when IRS agrees after review of your finances that payments to your tax debt you will incur an economic hardship. In order for a currently non-collectable option to be approved you will need to provide a financial statement that lists your monthly household and living expenses. If the IRS agrees that after you pay your monthly bills, such as rent, medical expenses, car loans, utilities, etc. that you have zero money left over to pay them they may put you on Currently Non Collectible status.
It is crucial that your monthly living expenses are reasonable in order for the IRS to consider a hardship and you don’t have considerable assets. There are several thousands of people throughout the country who are on Currently Non Collectible status and are not obligated make any payments on their tax debts, due to their economic hardship. The tax debt is eventually eliminated after the Collection Statue Expiration Date expires.
Abatement of Penalties
Penalty abatement eliminates penalties that have accrued since the beginning of your tax debt balance. In some cases the penalties are significant, encompassing upwards of twenty-five percent of the back tax debt balance. If some or even all of the penalties are abated or lifted it will certainly help with your major financial burden. Taxpayers may be qualified for a penalty abatement if they can demonstrate probable cause. Here are some examples of
1: Death of an immediate family member
2: A natural disaster occurred that you had zero control over
3: Theft or destruction of your personal or business records
4: Major disruption in your life such as incarceration
5: Family problems such as a divorce
6: Unemployment for a long period of time
7. Bad from advice of a license tax professional?
8. Prior alcohol or drug abuse
9. Victim of Identity theft
You must apply for your penalty abatement by filling out form 843 and provide supporting documents if available.
The Filing Process
Filing for an Offer in Compromise, Partial Payment Installment Agreement, Currently Non Collectible and Penalty Abatement can be a very detail and mind-numbing process, and for taxpayers who feel that they may qualify they should use the services of a license tax professional. We offer a free case review to discuss your tax situation in detail, just fill out the form to the right of this article.
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