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Our firm has a combined 60 years of direct IRS experience in the local, district, and regional tax offices of the Internal Revenue Service.
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The Offer in Compromise
The most common way to settle your IRS tax debt is through an offer in compromise.
Just for the record, I was a former revenue officer with the Internal Revenue Service.
I both worked and taught the offer in compromise or tax debt settlement program to new IRS agents.
You will find below everything you need to know about the program.
You may call us today for free initial tax consultation and we can let you know whether you are qualified to file for an IRS tax settlement offer in compromise.
If you’re not we can offer a variety of other tax debt solutions to fit your current financial situation you are in.
What is a Offer in Compromise or a Tax Debt Solution?
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:
- filed all tax returns,( we can prepare all your back tax returns )
- made all required estimated tax payments for the current year and
- made all required federal tax deposits for the current quarter if the taxpayer is a business owner with employees.
In most cases, 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 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 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.
Tax Forms to Use for a IRS Tax Settlement, Tax Debt Solution
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.
You must make sure these forms are accurate because IRS has the right to deny your offer in compromise if they are not filled out correctly. It is much easier for the Internal Revenue Service to reject your offer and acceptance or do not give them a reason for rejection.
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).
Application 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.
Choice to pay the Tax Settlement of Tax Debt Solution
Taxpayers may choose to pay the offer amount in a lump sum or in installment payments. you should talk to a true tax professional before you make a decision on which choice to choose when trying to resolve an IRS tax settlement.
- 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. PLEASE NOTE : 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.
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.
Accepted Offers in Compromise or Tax Settlement
If the IRS accepts the taxpayer’s offer, the IRS expects that the taxpayer will have no further delinquencies and will fully comply with the tax laws.
If the taxpayer does not abide by all the terms and conditions of the OIC, the IRS may determine that the OIC is in default.
For doubt as to collectibility and effective tax administration OICs, the terms and conditions include a requirement that the taxpayer timely file all tax returns and timely pay all taxes for 5 years from the date of acceptance of the OIC.
When an OIC is declared to be in default, the agreement is no longer in effect and the IRS may then collect the amounts originally owed (less payments made), plus interest and penalties. You can expect IRS to start enforcement i.e. the sending out a bank or wage levies.
Please note: Additionally, any refunds due within the calendar year in which the offer is accepted will be applied to the tax debt.
It is important to note that many tax firms promote taxpayers filing offers in compromise to settle their tax debt for pennies on the dollar.
Before anybody goes ahead to try to settle their tax debt they should walk to through the IRS pre-qualifier tool that you can find on our website.
When you do this you will find out if you’re eligible and what the lowest possible dollar settlement that could be achieved.
Call us today for free initial tax consultation.
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