Failure to meet your annual tax obligation is an invitation to severe financial and legal consequences. The IRS can impose legal penalties, delay reimbursement, and in worst-cases, seize your possessions and put you behind bars. There is no escape from filing and paying your taxes, but the IRS provides a few avenues to help those who are unable to make payments due to financial difficulties. Offer in Compromise “OIC”, is an agreement between the IRS and a taxpayer that allows the taxpayer to settle their tax liabilities for an amount less than the actual unpaid amount. It is, however, worth mentioning that taxpayers who are financially capable of paying their tax liability in full are ineligible for an OIC. If you owe a hefty amount to the IRS and are looking for relief, it is advisable to apply for an Offer in Compromise. To help you gain insight into the provision, in this blog post, we cover some things you need to know about the IRS Offer in Compromise.
Eligibility Criteria for OIC
Although an IRS lawyer is the best person to tell you whether your issue qualifies for an Offer in Compromise, we are going to discuss a list that can help you better understand the criteria to which an offer in compromise may be extended to a taxpayer.
- Doubt as to Liability
If a taxpayer disagrees or has doubts about the accuracy of a tax debt, they may file for an Offer in Compromise. Usually, taxpayers file for an Offer in Compromise under this category when they have a valid reason for the reduction or removal of penalties charged by the IRS, or believed that the IRS charged them additional interest because of some internal error.
- Doubt as to Collectibility
A doubt as to collectibility OIC is filed when the taxpayer agrees to owing the taxes but shows an inability to pay the tax debt in full. Under such circumstances, the IRS may consider your request and give you an offer to pay an amount lesser than what you actually owe. In such cases, the government’s objective is to collect an amount that’s reasonable and easily collectible.
- Effective Tax Administration
In case the taxpayer is ineligible for an offer in compromise based on Doubt as to Collectibility or Doubt as to Liability, they can still file for an offer in compromise under the Effective Tax Administration head. The IRS may approve the claim if it believes that paying the tax debt may cause the taxpayer economic hardships. In order to avoid this, the IRS may either allow the taxpayer to make partial payment or pay as per a short or long term deferred payment plan.
How To Make an Offer in Compromise With the IRS
Before submitting an offer to the IRS, it is essential to do your research and check whether you are eligible for OIC. You can also seek expert advice as to how to go about your current tax issue. Having that said, the process of submitting an offer is formal, and therefore you need to follow a set of defined steps for the IRS to receive, check, evaluate, and give you the green light for an offer in compromise.
If you file offline, it is important to attach the fee along with Form 656 and mail it to the IRS. Along with Form 656 and the application fee, you are also required to provide complete financial information using the Form 433-A or Form 443-B, “A” category for individuals whereas “B” category for businesses. Other information you need to provide the IRS include marital status and Collection Information Statement.
After you finish the form filling process, the IRS will ask for proof that will include financial documents, such as vehicle registrations, bank records, and other documentation. Follow the process to the book for speeding up the process of getting the decision from the IRS.
How Much Do You Actually Pay For IRS Offer In Compromise
Although there are unsurprisingly millions of people that face IRS tax problems and might have huge dues annually, only a small part of them are eligible to even apply for an offer in compromise. Furthermore, the acceptance rate is also pretty low at around one out of three as the IRS doesn’t approve them unless there is a special circumstance. It is highly recommended to hire an IRS tax attorney for help considering all the available options to settle your debt, including applying for OIC. Besides, you cannot even consider this option if you haven’t paid your taxes and filed returns timely for the last year of applying.
What is the “Actual” Amount You Pay
While some people think the IRS waives fines and interests and settles for a random fraction of the full due amount in an OIC, others believe the agency bargains with taxpayers about the amount to be paid. Well, none of these is true, as the IRS tax problem resolution process does not work like that. If a taxpayer is found to be eligible for an offer in compromise, the IRS collects a reasonable amount, known as its “Reasonable Collection Potential” (RCP), in the due period. RCP is a combination of the taxpayer’s net realizable equity (NRE) in assets and a part of their future monthly expendable income, depending on the type of OIC payment they choose.
Other OIC Charges
Firstly, you must know that no upfront payments are refundable, even if your application isn’t approved. There are two charges that a taxpayer has to pay when submitting an application for an offer in compromise- a $205 user fee and part of the offer amount. This amount may be 20% of the offer amount if the taxpayer chooses the lump sum payment method, or they’ll have to make monthly payments if they apply for the periodic payment method for as long as the IRS reviews the application. In addition, taxpayers cannot file for their next refund if the OIC application is accepted. Finally, they also have to deal with IRS tax attorney charges for expert help navigating the OIC process.
Recourse in Case of Denial
In case the IRS denies your OIC application, the IRS will most likely provide a written reason for the rejection. The IRS can reject an OIC application for various reasons, a few including: the taxpayer made an offer that was too low, or they have a criminal record. In case the rejection is due to an unacceptable offer, the IRS letter will mention an amount that is acceptable. Another thing you are entitled to in case of denial is a copy of the rejection report. You can, however, appeal to a rejected offer in compromise, but it is essential you meet the criteria mentioned below.
As mentioned before, for taxpayers that are considered to have low income, which means 250% or more below the poverty line for their income and family size, they don’t have to pay any user fee or partial payment for the offer amount when applying for an offer in compromise. The other options available include Partial Pay Installment Agreement (PPIA) and Currently Not Collectible (CNC). While the PPIA means that you can pay the monthly tax but won’t be able to pay the full amount in due time, CNC refers to situations where taxpayers are incapable of paying the dues with their monthly expendable income.
Offer In Compromise Vs Non-Collectible Status : Which Way To Go?
Both an Offer In Compromise and Non-Collectible status have their pros and cons, which you need to be aware of to make an informed decision on which avenue to pursue to resolve your tax issues.
Offer in Compromise
If you are unable to pay your tax debt, the IRS may consider your eligibility for currently Non-Collectible Status. The IRS will cease all collection activities, which includes levies and garnishments, till it notices an improvement in your financial condition. The IRS will send a statement that includes detailed information of the tax debt to the taxpayer every year the account is in CNC (Currently Non-Collectible) status. If the taxpayer is not able to pay the amount, the IRS will keep postponing the collection.
Making a Decision
Although the Currently non-Collectible status saves you from paying anything for a specific amount of time, the Offer In Compromise is a better tax resolution avenue as you do not have to worry about the future. If for instance, you owe the IRS $400,000 and can only offer $10,000 due to financial constraints, and wish to choose between CNC and OIC, it is better to pay $10,000 and save yourself from future tax liabilities instead of opting for Non-Collectible Status and carrying the burden of the tax debt for the coming years. If you do not have money to pay in full, there is no choice other than accepting CNC status.
When choosing the best tax solution for your financial situation, it is wise to discuss with an experienced lawyer to figure out what is best for you. Attorney Nick Nemeth at The Law Offices of Nick Nemeth can help you chart the best way forward, irrespective of how complex your tax matter is. We are a reputable tax resolution firm, with a proven track record, helping Texans with IRS tax debt problems for over a decade. If you are facing IRS debt problems or have any questions on the OIC or negotiation of Non-Collectible Status, feel free to call us at (972) 426-2553 to schedule your free, no obligation, consultation with Nick Nemeth. You may also fill out our contact form and our office will get in touch with you shortly.