When a taxpayer owes the IRS but cannot afford to pay the entire liability, they may be eligible for the Offer in Compromise program. This tax relief option could allow a taxpayer to settle IRS debt for an amount lower than the total due. Here are some important things to know about the OIC program.
8 Things to Know About the IRS Offer in Compromise Program
- IRS Collection Process
- Recent OIC Acceptance Rates
- OIC Reason Types
- Types of OIC Payments
- Reasonable Collection Potential
- Application Fees
- Alternative Options
To be eligible for an IRS Offer in Compromise (OIC) you must first owe a tax debt that you believe you cannot afford to pay the whole amount without detrimental impact. Usually, you will receive a tax bill from the IRS indicating the amounts owed, due dates, and other useful information. You will be required to file all required tax returns. It is also important to know that you cannot pursue an OIC while in bankruptcy proceedings.
How to Qualify for the IRS Offer in Compromise Program
To qualify for an Offer in Compromise, you must be eligible for one of the OIC types like Doubt as to Liability, Doubt as to Collectibility, or Effective Tax Administration. Generally, this means that you must be eligible for a reduced tax debt for one of those reasons.
You must ensure all estimated tax payments as well as federal tax deposits are submitted before the IRS will accept an offer. The IRS offers a pre-qualifier tool on their website and for more information, you can read IRS Form 656 Offer in Compromise Booklet.
The IRS will then consider income, assets, expenses, and a reasonable cost of living for a given area to determine the ability to pay the tax debt. If the IRS determines you can pay the tax debt in full you may not qualify. In this case, you may want to consider one of the other payment options including borrowing from friends and family, credit cards, loans, or home equity line of credit. You may also qualify for an alternative payment plan such as installment agreements.
8 Things to Know About the IRS Offer in Compromise Program
1. IRS Collection Process
When the IRS determines that you have a tax debt, you may receive a tax bill specifying the amount you may owe. Generally, the IRS statute of limitations extends for ten years from when the debt was assessed, though there are ways for these limits to be extended. Bankruptcy or a rejected Offer in Compromise may act to extend the timeframe that the IRS can attempt to collect a debt. Be aware that a tax debt can accrue immediately after taxes are due each year. If you do not file your taxes by the due date and pay any balance due at the same time, then you may be subject to penalties and interest. The IRS can apply penalties for failing to file and failing to pay. The failure to file penalty of 5% is much worse than the failure to pay penalty of 0.5% and both penalties can increase to a maximum of 25% each. Even with an extension, penalties and interest could start applying.
When the IRS determines you owe a tax debt, they will first mail a bill to alert the taxpayer. Failure to respond in a timely manner may cause the IRS to take more serious action. This can start with the issue of a Notice of Federal Tax Lien against the taxpayer’s property. When it comes to liens on property, the IRS has priority over other creditors which can make liquidating assets with an IRS lien more difficult.
Continued failure to pay can lead to the IRS seizing your property to satisfy the tax debt. The IRS can also levy your bank accounts, retirement accounts, automobiles, real estate, garnish paychecks, and even claim future tax returns. Generally, a taxpayer has a small window of opportunity to appeal decisions and take appropriate action. If action is taken quickly enough, it is possible to retrieve property that has been seized by the IRS. Submitting an Offer in Compromise to the IRS may cause the IRS to stop collection activities temporarily but could also extend how long the IRS can pursue unpaid taxes.
2. Recent OIC Acceptance Rates
Statistics show low acceptance rates for the Offer in Compromise program. According to the IRS Data Book released in September 2018, these rates hover below 41% accepted. In 2017, the IRS received 62,000 Offers in Compromise and accepted less than 25,000. 2018 saw slightly reduced OICs of 59,000 submitted with only 24,000 accepted. This low acceptance rate highlights the difficulty in attempting to settle your debt for less than the amount owed. You are not eligible for an OIC if you can reasonably be expected to pay the entire debt within a given timeframe. Due to the complex nature of the Fresh Start process, it can be difficult to correctly submit an Offer in Compromise. This is where an experienced tax professional can help settle your tax debt according to the Internal Revenue Code (IRC).
3. OIC Reason Types
The IRS allows an Offer in Compromise for three general reasons. The first is when there is reasonable doubt that the debt is actually owed by the taxpayer. This is called Doubt as to Liability and can be requested using IRS Form 656-L (Offer in Compromise (OIC) Doubt as to Liability). This could arise due to a mistake on an income tax return that triggered a tax debt. There may be a simpler solution, such as filing an amended tax return.
The next type of OIC the IRS will consider is when there is doubt that the debt can be collected. This Doubt as to Collectibility may be submitted when the formula the IRS uses to determine your ability to pay results in an amount less than the total debt. This is called the Reasonable Collection Potential (RCP) formula and considers the taxpayer’s ability to pay from income as well as expenses and a reasonable cost of living. If the IRS calculates the RCP as higher than the tax debt, this indicates that the taxpayer can most likely afford to pay the full debt and an OIC would be rejected.
The final OIC reason type is Effective Tax Administration. If the IRS calculates that a taxpayer could pay a legal tax debt but doing so might cause economic hardship, an Offer in Compromise may be accepted.
4. Types of OIC Payments
When preparing OIC payments for the IRS to satisfy your tax debt, there are two basic options. You can either pay a lump sum payment for the agreed upon amount or make periodic payments. The lump sum payment option is for a period of up to five months, allowing up to 5 payments — not including an initial payment of 20% which is non-refundable even if the OIC is denied.
Periodic payments can be spread from six months to a year and must be submitted with the first periodic payment. With both options, you may have to pay the application fee of $186 which is also non-refundable. Some taxpayers who qualify for low-income exceptions may be able to reduce or waive the application fees.
5. Reasonable Collection Potential
The Internal Revenue Service uses the Reasonable Collection Potential (RCP) to determine if a taxpayer can afford to pay a tax debt in full. This formula takes into account the income, equity, expenses, and cost of living. Bills, rent or mortgage, child support, car payments, and credit card debt are examples of factors that may impact the RCP.
A tax debt that doesn’t meet the calculated RCP will not qualify for an Offer in Compromise unless the collection process would cause economic or financial hardship. Economic hardship indicates an inability to meet reasonable basic living expenses or an inability to pay. The IRS will also determine the reasonable living expenses for an area. If the IRS determines that you can pay, they will deny the offer and may not return any payments submitted. However, you can appeal a decision within 30 days using IRS Form 13711 Request for Appeal of OIC.
6. Application Fees
The IRS charges a fee of $186 to submit an Offer in Compromise. Generally, this is non-refundable. You may also be required to submit a percentage of the total debt owed as a first payment. A lump sum payment requires the first payment of 20% to be submitted with the appropriate IRS forms. Periodic payments require the first payment. You will also be required to continue making payments while the offer is being considered. You will need to submit IRS Form 433 (OIC A for individuals) and 433 (OIC B for Businesses) along with supporting documents. Those who run a business as a disregarded entity, such as sole proprietors and single-member Limited Liability Companies (LLC)s, may need to file as individuals since the business and the taxpayer are considered one and the same.
Taxpayers who owe a liability to the IRS can find their assets seized. This can include real estate, personal or business property, vehicles, homes, bank accounts, and more. The IRS can also intercept any federal tax returns due in following years and apply the refund to the tax debt. Any refunds applied to a tax debt are not considered payments. In some cases, the IRS may hold a spouse jointly and severally liable for their partner’s tax debt and attempt to collect. This can also trigger the seizure of a spouse’s income tax refund.
8. Alternative Options
If you do not qualify for an IRS OIC, you may consider one of the other payment options available. First, it may be necessary to review the income tax returns submitted to ensure that they are correct, and all possible deductions, exemptions, and credits have been claimed. If you did not file a return, the IRS may file a return on your behalf which may not include everything you are entitled to claim. It’s a good idea to have a professional tax attorney review your income returns for tax problems.
Business owners can benefit from an expert review of payroll taxes, tax deposits, and their financial situation. The IRS offers a slew of alternative options, such as short-term and long-term installment agreements and penalty abatement. You may also qualify for tax debt relief under other IRS programs. For example, a spouse who is being held liable for their partner’s tax debt may qualify for Innocent Spouse Relief.
How Can a Tax Attorney Help?
There are many ways a tax attorney can help you successfully apply for an Offer in Compromise or alternative tax debt relief option. A tax attorney will know the right forms to use and understand how to correctly fill them out as well as how to appeal IRS decisions and navigate deadlines. Seeking the help of a professional can help avoid mistakes and errors that could cause an offer to be rejected. They can also help calculate your reasonable collection potential. This translates to improved ability to successfully submit an OIC. You can also get expert advice on other key issues, such as tax-free investing and negotiating denied Social Security Disability claims.
IRS Offer in Compromise
The IRS has expanded the way taxpayers can pay or settle tax debts in order to improve tax collection and ease their burden. The IRS can collect a tax debt by placing liens and then levying property. Instead, it is much better to negotiate with the IRS to avoid penalties and interest from accruing so rapidly.
Historically, the IRS has a low acceptance rate for an Offer in Compromise. You may be eligible for an OIC if you cannot reasonably pay a tax debt before it expires or when paying that debt would cause undue hardship. The two payment options are a lump sum paid over five or less months and periodic payments over six months but less than a year. To determine which payment option you are eligible for requires calculating the Reasonable Collection Potential, which factors income, assets, expenses, and a basic living expense.
To request an OIC, you must file the appropriate forms with the IRS along with the necessary application fee and first payments. It is important to know that refunds may be seized and applied towards the tax debt. Because dealing with the IRS can be difficult and require meeting deadlines with appropriate forms and documents, it may be best to consult with a tax attorney for advice. Contact Acadia Law Group today for a free consultation so we can help you find tax relief from the IRS.