I am a Former IRS Agent and Teaching instructor of the Offer in Compromise.) private practice since 1982. I am a tax expert on how to work a deal out with the Internal Revenue Service and settle a tax debt.
Being a former IRS agent one of the first questions I am asked by people who owe IRS tax debt is what does it take to work out a deal or settle my IRS tax debt?
It is a bit tricky when you work out a deal to settle your tax debt with the IRS. You must be a suitable and qualified candidate to settle your IRS tax debt and this process called offer in compromise.
- IRS accepts 38% of all offers in compromise filed.
- There were approximately 78,000 offers in compromise file last year with the Internal Revenue Service.
- Those that were accepted were settled for an average of $.14 on the dollar.
The Process to work out a deal with the IRS and settle a IRS Tax Debt
Offers In Compromise/Settle Tax Debt
What is an OIC?
An offer in compromise (OIC) is an agreement between a taxpayer and the Internal Revenue Service that settles the taxpayer’s tax liabilities for less than the full amount owed.
If the liabilities can be fully paid through an installment agreement or other means, the taxpayer will in most cases not be eligible for an OIC.
In order to be eligible for an OIC, the taxpayer must have:
1. filed all tax returns,
2. made all required estimated tax payments for the current year and
3. made all required federal tax deposits for the current quarter if the taxpayer is a business owner with employees.
The IRS will not accept an OIC unless the amount offered by the taxpayer is equal to or greater than the reasonable collection potential the RCP.
The RCP is how the IRS measures the taxpayer’s ability to pay.
The RCP includes the value that can be realized from the taxpayer’s assets, such as real property, automobiles, bank accounts, and other property.
In addition to property, the RCP also includes anticipated future income, less certain amounts allowed for basic living expenses.
The IRS may accept an OIC based on three (3) grounds.
First. Acceptance is permitted if there is doubt as to liability.
This ground is only met when there is a genuine dispute as to the existence or amount of the correct tax debt under the law.
Second. Acceptance is permitted if there is doubt that the amount owed is fully collectible. Doubt as to collectibility exists in any case where the taxpayer’s assets and income are less than the full amount of the tax liability.
Third. Acceptance is permitted based on effective tax administration.
An offer in compromise may be accepted based on effective tax administration when there is no doubt that the tax is legally owed and that the full amount owed can be collected, but requiring payment in full would either create an economic hardship or would be unfair and inequitable because of exceptional circumstances.
Submissions of the Settling to Tax Debt through the OIC
When submitting an OIC based on doubt as to collectibility or based on effective tax administration, taxpayers must use the most current version of Form 656, Offer in Compromise, and also submit Form 433-A (OIC) (PDF), Collection Information Statement for Wage Earners and Self-Employed Individuals, and/or Form 433-B (OIC) (PDF), Collection Information Statement for Businesses.
A taxpayer submitting an OIC based on doubt as to liability must file a Form 656-L (PDF), Offer in Compromise (Doubt as to Liability), instead of Form 656 and Form 433-A (OIC) and/or Form 433-B (OIC). Form 656 can be found in the Offer in Compromise Booklet, Form 656-B (PDF).
Fees
A taxpayer must submit a $186 application fee with the Form 656. Do not combine this fee with any other tax payments.
There are, however, two exceptions to this requirement.
First, no application fee is required if the OIC is based on doubt as to liability.
Second, the fee is not required if the taxpayer is an individual (not a corporation, partnership, or other entity) who qualifies for the low-income exception. This exception applies if the taxpayer’s total monthly income falls at or below 250 percent of the poverty guidelines published by the Department of Health and Human Services. Section 4 of Form 656 contains the Low Income Certification guidelines to assist taxpayers in determining whether they qualify for the low-income exception.
A taxpayer who claims the low-income exception must complete section 4 of Form 656.
How to Pay to Settle IRS Tax Debt
Taxpayers may choose to pay the offer amount in a lump sum or in installment payments.
A “lump sum offer” is defined as an offer payable in 5 or fewer installments within 5 or fewer months after the offer is accepted.
If a taxpayer submits a lump sum offer, the taxpayer must include with the Form 656 a nonrefundable payment equal to 20 percent of the offer amount.
This payment is required in addition to the $186 application fee.
The 20 percent payment is “nonrefundable” meaning it will not be returned to the taxpayer even if the offer is rejected or returned to the taxpayer without acceptance.
Instead, the 20 percent payment will be applied to the taxpayer’s tax liability. The taxpayer has a right to specify the particular tax liability to which the IRS will apply the 20 percent payment.
An offer is called a “periodic payment offer” under the tax law if it is payable in 6 or more monthly installments and within 24 months after the offer is accepted.
When submitting a periodic payment offer, the taxpayer must include the first proposed installment payment along with the Form 656.
This payment is required in addition to the $186 application fee.
This amount is nonrefundable, just like the 20 percent payment required for a lump sum offer.
Also, while the IRS is evaluating a periodic payment offer, the taxpayer must continue to make the installment payments provided for under the terms of the offer.
These amounts are also nonrefundable.
These amounts are applied to the tax liabilities and the taxpayer has a right to specify the particular tax liabilities to which the periodic payments will be applied.
Ordinarily, the statutory time within which the IRS may engage in collection activities is suspended during the period that the OIC is under consideration and is further suspended if the OIC is rejected by the IRS and where the taxpayer appeals the rejection to the IRS Office of Appeals within 30 days from the date of the notice of rejection.
How to Work out a Deal with IRS to Settle IRS Tax Debt, Former IRS
