.Reduce IRS Debt with an Offer in Compromise
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.
Offer in Compromise Eligibility
To be eligible to file an Offer in Compromise, you must first be in compliance, meaning:
1. All required tax returns have been filed.
2. All Estimated Tax Payments are up to date.
3. All Federal Tax Deposits have been made and are up to date.
Depending your situation, an Offer may be available if you are one of the following:
- 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 take into account 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.
Keep in mind, the IRS generally accepts only 40% of Offers submitted. In 2017, 62,000 taxpayers submitted an Offer and only $25,000 were accepted.
Amount of an Offer in Compromise
An Offer in Compromise is based on your Reasonable Collection Potential, not the amount of debt you owe to the IRS. Therefore, start here to figure your amount you could Offer:
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 1st and 15th 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.
Requesting an Offer in Compromise
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.
Offer in Compromise 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.
Rights When Dealing With the IRS
The IRS has a Taxpayer Bill of Rights. These are your rights as a taxpaying citizen of the United States. It’s important to know your rights. These were taken directly from the IRS website.
- The right to be promptly informed about what you must do to comply with the tax laws, including a thorough explanation of IRS decisions about your tax account and the outcomes of these decisions.
- The right to professional services, including polite, efficient, and high-quality assistance, and the right to speak to a supervisor when treated with discourtesy.
- The right to have the amount of tax you owe calculated correctly and to pay only the amount due, along with assessed interest and penalties.
- The right to respond to IRS actions with additional information and evidence to support your objections.
- The right to appeal decisions you disagree with in a public forum, up to and including the U.S. tax court.
- The right to understand the maximum amount of time the IRS has to collect a tax debt and the maximum amount of time you have to challenge or appeal the agency’s position.
- The right to due process during IRS investigations, including law enforcement actions that are no more intrusive than necessary.
- The right to keep your private information kept confidential by the IRS.
- The right to have representation during tax proceedings.
- The right to a fair and just tax system.