Guide to Getting an Offer in Compromise Accepted
If you owe a large debt to the IRS or State, and it is unlikely that you will ever be able to pay the debt in full, you may be eligible for an Offer in Compromise. Essentially, an Offer in Compromise is an agreement where you agree to pay a reduced sum, and the IRS or State waives the remainder of your debt. There are three types of Offers in Compromise.
- Doubt as to Liability. This is when there is doubt as to whether the tax total that was assessed is correct. If there is any doubt that an error was made, you may be able to reach a compromise.
- Doubt as to Collectability. This is when there is doubt as to whether the full amount of the debt could ever effectively be collected. The IRS or State will consider extreme financial hardship and may agree to settle for an amount that is much less than the full debt.
- Effective Administration. You may qualify if you have the ability to pay all the back taxes, but due to exceptional circumstances, paying the full amount of taxes would result in economic hardship. Most of the time, this involves some type of life changing medical tragedy than requires you to retain all savings and assets just to stay alive.
If you think you may be able to reach this compromise with the IRS, you must start by getting into and remaining in compliance with all tax returns and estimated payments.
What Is an Offer in Compromise (OIC)?
An Offer in Compromise is an agreement between you and the Federal Government to settle your back taxes for less than you owe.
An Offer in compromise is strictly based on numbers; basically, your income versus your expenses and the equity in your assets.
If you can prove to the IRS you do not have the ability to pay back your taxes in full before the Statute of Limitations expires, then you may be eligible to file an Offer in Compromise. However, it will depend on your Reasonable Collection Potential and how much time is left before Statute of Limitations on the debt expires.
The Decision-Making Process for an OIC
When you file an Offer in Compromise, you wonder why it takes so long for the whole process to be completed. You think to yourself, gosh, I submitted this Offer like six months ago and I still haven’t heard anything. As you will find, when dealing with the IRS it all takes time.
Submission – Once your Offer is complete and mailed to the IRS (hopefully with tracking) it first goes to an Offer Reviewer. This Agent is the first in line to do a general overview of your Offer. Is your Offer complete, meaning all the spaces filled in? Did you send in your application payment and 20% down payment? Are all your returns filed? Are you up to date on your Estimated Tax Payments? If the answer is No to any of these questions, this Agent will return to our Offer via mail and inform you why it was not accepted for processing. In some cases, this first process can take up to six months as Offers are served in a first in, first out basis.
Processing – Once your Offer is accepted for processing, the Offer Reviewer will then forward your Offer to an Offer Examiner for review. This Offer Examiner is assigned to your Offer for a more in-depth look at your Offer and will, ultimately, be the Agent to accept or reject your Offer. For an Offer Examiner to be assigned, could take another three to six months as again, first in, first out. The Offer Examiner will review all documents submitted with your Offer and to ensure all your income, expenses, investments, etc. are supported. Once their analysis is complete, they will contact you to discuss your Offer and ask if there is any other information you wish to add or dispute. Typically, you have a week or so to provide the additional information. Once that review is complete, they will contact you to inform if they are accepting, increasing, or rejecting your Offer. They will issue their determination in writing with a calculation table showing how and why that is their decision. If your Offer is rejected, you will have 30 days to request an Appeal. Always request an Appeal!
Complete – If you go through Appeals, the Offer Examiner will give you 30 days to respond. Once your timely response is received, they will forward your Offer to Appeals for assignment to an Officer. Again, first in first out. From there, you work with Appeals. If your Offer is accepted, you must ensure compliance over the next five years. At this point, your Offer will be assigned to a Tax Examiner who will monitor your case to ensure compliance is met. If not, you will receive a notice to rectify the issue immediately or your Offer will default.
Time – As you can see, filing an Offer takes a lot of time as there are many people involved in researching your case. An Offer in Compromise is there to assist those who truly are in need of a compromise to their tax obligations. Some people will try to cheat the system, unfortunately. This is why the IRS has so many people in place to review your Offer; to ensure there was not a failure to disclose assets, what does your tax return say about you that you neglected to mention in your Offer, was there a dissipation of assets, or are you even eligible to submit an Offer. In the end, expect an Offer in Compromise to be under review for at least one year, could be as long as two.
Who Is Eligible to Receive an OIC?
- You could qualify for a currently not collectible status because you can pay very little or nothing. In an Offer in Compromise you must calculate your disposable income based on the national standard. If you have a low or no disposable income, you may be a candidate for an Offer in Compromise.
- You have minimal equity in assets. In an Offer in Compromise, you must determine the equity in your assets. You would have equity if after discounting the asset to the quick sale value (80%) and subtracting any outstanding loan, you still have equity in your assets. Most of your personal household goods and tools of the trade above a specific amount would be considered out of reach by the IRS. The value of retirement plans at 70%, less taxes to liquidate, would also be included. If you have a low or no equity in assets, you may be a candidate for an Offer in Compromise.
- You have considered how long an Offer in Compromise could take. An Offer in Compromise could take anywhere from 33 months to 48 months to complete in full before the debt is considered paid in full. If you have done the calculation of the possible time and can weather this storm, you may be a candidate for an Offer in Compromise.
- You have considered the remaining Statute of Limitations the IRS has left to collect the tax. The IRS has ten years to collect a tax liability. Submitting an Offer in Compromise extends the collection statute. If making payments over the remaining Statute of Limitation would cause you to pay less towards your overall tax debt, the Offer in Compromise may not be the best solution. If this is not the case, you may be a candidate for an Offer in Compromise.
- You have considered other options. Bankruptcy can eliminate certain tax debts if they qualify for discharge. It is extremely important to understand which debts qualify for discharge. If you have spoken to a Bankruptcy Attorney and the have determined the amount of dischargeable tax debt or that Bankruptcy is not the best option, you may be a candidate for an Offer in Compromise.
Requesting an OIC
To Request an OIC, you must be sure to file the following items in order for your Offer to be received, reviewed and forwarded to an Offer Examiner:
1. Submit Forms 656 and 433-A (Individual) OIC or 433-B (Business) OIC.
2. Submit the Application Fee for each Form 656 you send in. Fee is currently set at $205.
3. Submit the 20% down payment, unless you are considered low income.
4. Any and all documents required to be reviewed. For example, bank statements, income statements, investment accounts, vehicle ownership and operating costs, etc. Any item you wish to include as an income or expense must be accompanied by a document proving this is your income or that you pay that expense.
5. Ensure all tax returns are filed. If you recently filed a return, it will not be in the IRS system yet so you will need to send a copy of that return with your Offer.
Failure to provide the above will cause your Offer to either be returned or rejected without further review or consideration.
How Much Tax Debt Do You Owe?
When filing an OIC, it doesn’t matter how much tax debt you have with the IRS. What matters is what is your Reasonable Collection Potential. Meaning, how much could the IRS expect to collect from you in the next 12 or 24 months to pay toward your tax debt. The following items are considered when reviewing an OIC:
1. Determine your disposable income. Your income, less your allowable living expenses, equals your monthly disposable income. The IRS is going to put a value on your cash flow for purposes of determining your OIC settlement value.
2. Determine Value in Assets. After determining the settlement value of your disposable income, the IRS will then turn to a valuation of your assets and add that to the value of your disposable income.
You will need to determine what your assets are worth. This would include your car(s), house(s), retirement plan(s) and any other assets. Subtract any loans to arrive at equity, and in most cases, reduce that by 20% to get to your IRS valuation.
3. Offer Amount. Add your cash flow (multiplied by a factor of 12 or 24) to your asset value, and you have your proposed IRS settlement amount.
That formula yields an average of $10,234 to the IRS. It could result in more or less for you, depending on your financial circumstances.
Keep in mind, the IRS disagrees with taxpayers’ valuations and calculations 60% of the time and rejects those Offers.
Understanding the Terms and Conditions of an OIC
As it states in the Offer in Compromise Booklet of Instructions:
1. The IRS will keep any refund, including interest, for tax periods extending through the calendar year that the IRS accepts the offer. For example, if your offer is accepted in 2020 and you file your 2020 Form 1040 on April 15, 2021 showing a refund, the IRS will apply your refund to your tax debt. The refund is not considered as a payment toward your offer.
2. Penalties and interest will continue to accrue during consideration of your offer.
3. After you submit your offer, you must continue to timely file and pay all required tax returns, estimated tax payments, and federal tax payments for yourself and any business in which you have an interest. Failure to meet your filing and payment responsibilities during consideration of your offer will result in your offer being returned. If your offer is accepted, you must continue to stay current with all tax filing and payment obligations through the fifth year after your offer is accepted (including any extensions).