How Much Will the IRS Settle For? A Brief Guide to an Offer in Compromise

How Much Will the IRS Settle For? A Brief Guide to an Offer in Compromise

I am sure you have heard many ads on the radio or television stating, “We can resolve your IRS problems for pennies on the dollar!”  If you have heard these ads, 1. Run away and 2. These companies are referring to the Offer in Compromise (OIC) program.  This program allows taxpayers to settle tax liabilities for less than the full amount owed.  The ultimate goal is a compromise that suits the best interest of both the taxpayer and the IRS.

Before your offer can be considered, you must file all tax returns you are legally required to file, make all required estimated tax payments for the current year, and make all required federal tax deposits for the current quarter if you are a business owner with employees.

You may be saying to yourself; this sounds too good to be true!  Before the IRS considers an OIC, there are certain items that are reviewed to ensure the taxpayer does not have a significant amount of assets that could be liquidated to pay the tax liability in full, such as; second home, primary home is paid off and a Home Equity Line of Credit can be taken out against the property, boats, RV’s…you get the picture.

It is also important to note that 80% of all Offer in Compromise (OIC’s) are rejected, either through an Offer Examiner or Appeals.  Some taxpayers believe if they file an Offer, this will “buy” time until they can figure something out.  However, the OIC process is not quick; it can take 6-9 months to go through the entire process from submittal all the way through to acceptance or denial.  Still think it’s a good idea?  Also remember the minute the IRS receives your OIC your Collection Statute Expiration Date (CSED’s) are extended every day your OIC is in process and for 30 days after it has been denied.

How Do I Begin This Request?

However, there are some basic steps to go through before you decide if an Offer is the best choice for you and your outstanding liability.

1.  Gather your documents and compile your information.  Grab a month’s worth of bank statements, paystubs, utility bills, car payments; anything you pay each and every month
2.  Calculate the equity in your assets.  This means take the Quick Sale Value (QSV) which is 80% of the full value, less encumbrances (amount left on the loan) to determine the equity in your assets.  For example: A 2013 Chevrolet Impala with 36,000 miles is worth approximately $10,500, according to Kelly Blue Book.com.  Let’s say you have a loan on the vehicle in the amount of $11,200; there would not be any equity in this vehicle.  However, using this same information without a loan, there would be $10,500 worth of equity less $3,450 for the IRS allowance.  Therefore, your equity would be $7,050.  If this is your only vehicle will the IRS show up and seize the property to pay towards your liability, no!  But, if you had three more of these vehicles and you are the only person using them, then, yes, you could be asked to sell these vehicles as in the IRS’ eyes you are one person who needs one vehicle. 
3. Determine your NET disposable income.  If you are paid weekly, take your net pay times 4.3.  If you are paid bi-weekly (every 2 weeks no matter what day it falls on), take your net pay times 2.17.  If you are paid bi-monthly (on the 1^st and 15^th or variation), take your net pay times 2.  Example: Every two weeks taxpayer is paid a NET pay of $1,000.  Therefore, $1,000 times 2.17 equals $2,170
4. Determine your “reasonable collection potential”.  This means looking at your NET income versus your monthly expenses (be realistic) to determine what your disposable income is at the end of every month, rather what amount are you left with in your bank account when all bills have been paid.
5. Lastly, calculate how this amount will be paid.  If you are choosing the Lump Sum Offer, you will calculate your disposable income times 12.  If you are choosing the Deferred Offer, you will calculate your disposable income times 24.

Which OIC Should I Apply For?

There are three kinds of OIC’s:

1.  Doubt as to Collectability;

2. Doubt as to Liability, and;

3. Effective Tax Administration. 

The majority of Offers submitted are due to Doubt as to Collectability.  This means you have insufficient assets and income to pay the full amount owed to the IRS in back taxes.

Doubt as to Liability means there is an error and you do not believe you owe this tax. The burden of proof is definitely on you so be sure you are absolutely prepared to show you are not liable.

Effective Tax Administration means you could afford to pay the full amount owed (based on IRS formula), but you are offering less because of special circumstances.  Basically, you could pay the tax, but it would be unfair of the IRS to force you to do so.  In this case, you will also need to submit a written statement with your Offer explaining your circumstances.  Some examples are your spouse or child has been diagnosed with a terrible disease and any funds you have available would need to be used to care for a loved one.  Unfortunately, fur babies (pets) do not count as “special circumstances” in the eyes of the IRS.

What Are My Payment Options?

There are two kinds of payment options:

            1. Lump Sum Payment, and;

            2. Deferred Payment.

With either payment option there is an application fee of $205 (non-refundable) unless you are considered low-income which there is a chart included in the OIC Booklet.

A lump sum payment is used when you will be paying the Offer in 5 months or less.  These payments start once your Offer has been accepted and the Offer must be paid in full within 5 months of the acceptance of your Offer.  The guidelines for this Offer allow you to either pay the entire amount of the Offer when submitting your application or include a minimum 20% deposit (non-refundable) and take up to 5 months to pay the remaining settlement amount.  Also, with this option your Offer amount would be significantly less than the deferred payment option.  The reason is due to the fact that your future monthly income is times by 12 versus 24 for the next option.

A deferred payment is used when you will be paying your Offer over 24 months.  This option requires you to submit your first month’s payment when submitting your Offer.  You must continue to make this same monthly payment the entire time your Offer is being considered and if your Offer is rejected or returned, the payments are applied towards your tax liability.  However, if your Offer is accepted, you would continue to make the monthly payments until all 24 have been made on time and in full.

What Can I Expect?

Once you feel your Offer is prepared and ready to be submitted to the IRS for review, here is what to expect throughout the process:

1.  Offer is submitted to either Memphis or Brookhaven.  Remember to include your $186 application fee, make sure your Offer is signed and include either your 20% down payment or first month’s payment with the Offer.  On the check, be sure to write your Social Security number and OIC Payment.  As any Offer must be sent via mail and cannot be faxed or emailed, be sure to send it in such a way you are able to track your packet, such as; FedEx, UPS or USPS Certified Mail.
2.  You will receive a letter from the IRS informing you your Offer has been received and you will be contacted within the next 120 days.
3.  You will receive a letter from the Offer Examiner who has been assigned to review your Offer.  At this point, we suggest contacting the Offer Examiner directly as a follow-up to see if they are requesting any further documentation.  9 times out of 10 you will be contacted, but there are times when a call is missed and if the Offer Examiner is unable to reach you they will send a letter stating this fact and your Offer will be rejected.  At this point, you would need to resubmit a new Offer.
4. Work with your Offer Examiner to ensure they do have all the information they need to make a real determination in your Offer.  They may requested updated bank statements, pay stubs, etc… as remember, it has been approximately 4 months since you submitted your Offer and some of the information may be out of date.  If they do request updated information, provide it to them in a timely manner, send it via fax and make sure you receive a confirmation and follow-up via phone to ensure it has been received.
5. If the Offer Examiner agrees with your Offer amount, it will be forwarded for approval by a separate unit.  You will then receive a letter of acceptance and this is where payments begin for a Lump Sum Offer.
6. After you receive the letter of acceptance your case will be assigned to a Tax Examiner for the next 5 years.  This person is assigned to monitor your case to ensure all Offer payments are made, all tax returns are filed and that you did not accrue any additional liability.  If any of these guidelines are not met, your Offer will be returned / rejected and your total liability before you submitted the Offer becomes due, along with all penalties and interest. 

What happens if your Offer is rejected because the IRS determines you have the ability to pay your liability in full before the CSED’s run out?  First, you have the right to know why you Offer was rejected.  Second, you have the right to appeal the findings of the Offer Examiner.  Typically, you will be arguing to Appeals to include an expense or asset item that was disallowed by the Offer Examiner.  Appeals Officers have authority to accept or reject an Offer based on their own findings and are separate from the findings of an Offer Examiner.  Remember, you only have 30 days to Appeal.  Otherwise, you would, again, need to re-submit the OIC.