Every taxpayer in trouble seems to want to settle for pennies on the dollar which involves doing an Offer in Compromise (OIC), but very few understand what an IRS Offer in Compromise entails. In many instances, an Offer in Compromise is not the best option, even if you qualify. To make sure that you are making the right tax resolution decision, we will detail for you the benefits and challenges of an IRS Offer in Compromise. Our goal is to help you move forward with resolving your IRS tax debt. We want to help you to restore both your long-term financial security and your peace of mind.
Before detailing the intricacies of an IRS Offer in Compromise, you need to be aware of an important notification that the Internal Revenue Service posted on their website in regards to future applications for and filings of an IRS Offer in Compromise.
The 2017 notification by the IRS explains the following:
“Beginning with Offer applications received on or after March 27, 2017: The IRS will return any newly filed Offer in Compromise application if you have not filed all required tax returns. Any application fee included with the OIC will also be returned. Any initial payment required with the returned application will be applied to reduce your balance due.”
The key point that needs to be highlighted in this update is that an IRS Offer in Compromise has become even more of a challenge. If you put aside funds to make your down payment on the Offer, and the offer is returned, you will need to come up with more funds to reapply. Even with the higher acceptance rates of IRS Offers in Compromise in recent years, a successful tax resolution outcome has become even more demanding. An IRS Offer in Compromise is only accepted if a taxpayer is up-to-date and compliant with all other IRS tax requirements and filings both within and outside of the tax years under the rubric of the offer. If one detail is out of place, the IRS Offer in Compromise filing will not be processed.
At the same time, going for an Offer in Compromise with the help a qualified tax resolution specialist makes sense. When the IRS recently released their annual offer in compromise (OIC) data for 2016, the OIC acceptance rate had reached a new all-time high of 42.86%. When you work with the Tax Resolution Institute, your potential acceptance rate will be almost 50% higher. TRI is proud to have a long-term OIC acceptance rate with the IRS of over 96%. Given such high acceptance rates, an Offer in Compromise could be the right tax resolution pathway to IRS tax debt relief for you.
What is an IRS Offer In Compromise?
An IRS Offer in Compromise allows a taxpayer to settle, in a lump sum their delinquent tax debt for less than the full amount owed to the Internal Revenue Service.
The OIC process can be applied both to individual tax liability and business tax liability. Although an IRS Offer in Compromise is a legitimate tax resolution option assuming an individual or business qualifies by being unable to pay their full tax liability on account of a lack of funds (financial hardship), it is not an easy process. In addition to meeting the stringent financial parameters necessary to qualify for an IRS offer in compromise, a taxpayer must have done the following:
- Filed all prior tax returns
- Made all required estimated tax payments for the current year
- Made all required Federal tax deposits for the current quarter assuming the taxpayer is a business with employees and owes payroll tax.
In the case of filing an OIC, Doubt as to Collectability (see more below), the IRS will not accept an offer unless the amount offered by a taxpayer is equal to or greater than the taxpayer’s Reasonable Collection Potential (RCP). This equates to the amount the IRS believes they can collect from the taxpayer over the remaining collection period (statute). The RCP includes the amount that may be realized by both liquidating the taxpayer’s assets including real property, automobiles, bank accounts, and accounting for the taxpayer ability to earn going forward.
RCP income is calculated by the taxpayer’s take-home pay less necessary and reasonable living expenses. You may think, that you can include everything you pay for as living expenses but the IRS has specific standards that they will allow for OIC purposes. That is, you need to account for the fact that basic living expenses from the perspective of the IRS and basic living expenses from your perspective may be two very different numbers.
To see how much the IRS allows for living expenses such as Food and Clothing, Housing, Transportation and Out of Pocket Health Costs, you need to reference the IRS national and local standards for living expenses.
How the IRS Estimates a Taxpayer’s Ability to Pay
The IRS calculates a taxpayer’s ability to pay by multiplying their disposable income (again, take-home pay minus living expenses) by twelve. This amount plus the taxpayer’s quick-sale value of assets (about 80% of the “Garage Sale” value of their assets) makes up the total offer amount.
The IRS looks in detail at each taxpayer’s unique set of circumstances, records provided by the taxpayer, and other mitigating circumstances such as the taxpayer’s age or state of health.
Assuming other non-financial parameters are met, offers in compromise will typically be approved when the amount being offered by the taxpayer represents the most that the Internal Revenue Service can expect to collect within the collection statute. Given the strict nature of an IRS Offer in Compromise, it is necessary to work with a qualified tax resolution specialist. After all, the IRS recommends, and for good reason that taxpayers explore all other payment options before submitting an offer in compromise. The Internal Revenue Service wants taxpayers to know that the offer in compromise program is not for everyone.
In truth, there are several other programs that may cost you less in both implementing the plan and payments made to the IRS. Even more bothersome, If you are not eligible or do not qualify for an IRS offer in compromise, such a filing only ends up being a huge waste of time and money. In addition, it also extends the time the IRS is allowed to collect on the debt.
Are You Eligible for an IRS Offer in Compromise?
Before the Internal Revenue Service consider an offer in compromise, a taxpayer must be in full compliance. This means that they are up to date with all filings, and have made all required payments for the current period. The IRS provides an Offer in Compromise Pre-Qualifier tool to confirm a taxpayer’s eligibility and prepare a preliminary proposal.
Even if you seem to qualify based on the IRS’ prequalifier, there is a problem to consider. Like any bureaucratic government tool, the Offer in Compromise Pre-Qualifier has its limits and may be difficult to employ, especially for a someone that is not a tax resolution professional. To illustrate, even an experienced tax accountant may misuse this tool if they are not well versed in preparing offers in compromise.
If it is difficult for an experienced tax accountant to use the Offer in Compromise Pre-Qualifier tool correctly, you can imagine how challenging it would be to prepare an offer in compromise for the IRS and bring it to the finish line yourself. Historically, the majority of offers in compromise that are submitted are rejected, and this is the reason why. The goal of the IRS is to get as much money as possible over the collection statue. If they can get more not accepting an offer, they will not do so. If taxpayers knew they could skip paying taxes and “write off” the majority of what they owe at a later time, everyone would file an offer in compromise. This is why they do not make the offer in compromise process easy to accomplish.
To illustrate its limitations, the IRS states on their website that the Offer in Compromise Pre-Qualifier tool should only be used as a guide. Although they give the impression of wanting to help taxpayers, in truth the IRS is interested in “opening the door” and so that a beacon may be shined on a not only the taxpayer’s delinquent tax debt, but also on their ability to pay. If a taxpayer takes this first step without being properly advised, they are cooking up a recipe for failure.
Submitting an IRS Offer in Compromise
Step-by-step instructions along with the forms necessary to submit an IRS offer in compromise can be found in the Offer in Compromise Booklet, Form 656. Even though the IRS Offer in Compromise Booklet provides detailed instructions and forms, it is still difficult for anyone else. The requirements for submitting an IRS Offer in Compromise are extensive. One simple mistake will equal a rejection.
For example, the requirements for submitting an IRS Offer in Compromise include:
- Form 433-A (OIC) for Individual taxpayers must be submitted.
- All the required documentation specified by the IRS for the 433-A (OIC).
- Form 656 for individual tax debt must be submitted on a separate Form 656. In certain cases, multiple 656 forms are required.
- Initial payment (non-refundable) for each Form 656 submitted.
- Form 433-B (OIC) for businesses must be submitted
- All the required documentation specified by the IRS for the 433-B (OIC)
- Form 656 and business tax debt (Corporation/ LLC/ Partnership) must be submitted on a separate Form 656. Often, multiple 656 forms are required.
- Initial payment (non-refundable) for each Form 656 submitted.
- $186 application fee (non-refundable).
As you can see, the IRS Offer in Compromise process is complicated. For anyone outside of a tax resolution specialist, it can be downright overwhelming.
The OIC Process Suspends Only Some Tax Collection Actions
Do you realize that the OIC process suspends only some tax collection actions? It does not stop the tolling of your IRS delinquent tax debt as penalties and interest continue to accumulate. Also, even with the support of a tax resolution specialist, it takes an extended amount of time to complete. Without such support, taxpayers have said that it feels like it takes forever. Given such exactitude, the OIC process must be done right.
During the OIC process when an IRS Offer in Compromise is being submitted and considered by the Internal Revenue Service, the following is true:
- A Notice of Federal Tax Lien can still be filed during the OIC process.
- A taxpayer’s non-refundable payments and fees will be applied to any existing tax liability. In other words, once paid, any money applied to the OIC process is used and cannot be recovered, regardless of the outcome.
- A taxpayer may designate that such payments are applied to a specific tax year and tax debt. Such a designation requires professional support.
- Collection activities like IRS bank liens and wage garnishments are temporarily suspended during the OIC process. However, if an Offer in Compromise is rejected by the IRS, such collection actions immediately resume.
- The legal assessment and collection period is extended for the IRS during the OIC process. In other words, they get more time to take action against you.
- An IRS Offer in Compromise is automatically accepted if the IRS does not make a determination within two years of the IRS receipt date of the OIC being submitted. However, this is a bit of a fairy tale and almost never happens.
IRS Grounds for OIC Acceptance
The acceptance of an IRS Offer in Compromise is not random. The Internal Revenue Service outlines definite reasons why an IRS Offer in Compromise is considered for acceptance. By understanding these grounds for acceptance, it is easier to move forward and make the right decision. After all, if an OIC is not going to be accepted, there is no reason for a taxpayer’s time and money to be wasted
IRS acceptance of an Offer in Compromise is based on three grounds. The three grounds of acceptance are as follows
- Doubt As To Collectability
The most common reason for an IRS to accept an Offer in Compromise is because they do not believe that the amount owed is fully collectible. Doubt as to collectability exists in any case where the taxpayer’s assets and income are less than the full amount of the tax liability.
- Effective Tax Administration
Effective tax administration is grounds for acceptance when there is no doubt that the tax is legally owed and that the full amount owed can be collected, but requiring payment in full would lead to other problems like an economic hardship or would be unfair and inequitable because of exceptional circumstances.
- Doubt As To Liability
If there is doubt as to liability because of a genuine dispute as to the existence or amount of the correct tax debt under the law, then the Offer in Compromise will be accepted. The doubt as to liability is a rare reason for an Offer in Compromise to be accepted since, in a sense, the IRS is admitting a mistake. The IRS rarely admits that it is ever wrong.
More IRS Offer in Compromise Information to Know
As you can see, the IRS Offer in Compromise process is confusing and challenging. Expertise is needed to lead to a successful completion. Even after the OIC process has been resolved, the challenges are not over.
Below are several key aspects of the ongoing OIC Process:
Ongoing IRS Offer in Compromise Terms
If an IRS Offer in Compromise is accepted, the IRS expects that the taxpayer will have no further tax payment delinquencies. Moreover, the taxpayer must fully comply with the tax laws moving forward. For doubt as to collectability and effective tax administration grounds of acceptance, the terms and conditions include a requirement that the taxpayer file all tax returns and timely pay all taxes for five years from the date of acceptance of the IRS Offer in Compromise.
If the taxpayer fails to abide by all the terms and conditions of an IRS Offer in Compromise, the Internal Revenue Service may determine that the taxpayer is in violation and place the Offer in Compromise in default. When an OIC is declared to be in default, the agreement is no longer in effect, and the IRS may then collect the amounts originally owed (fewer payments made), plus interest and penalties. Moreover, any tax refunds due within the calendar year in which the OIC process has been resolved and the IRS Offer in Compromise is accepted will be applied to the tax debt.
Right for a Taxpayer to Appeal (Form 13911) s an OIC Rejection
If the Internal Revenue Service rejects an IRS Offer in Compromise, the taxpayer will be notified by mail. The letter will explain the reason that the IRS rejected the offer. Also, the IRS will provide detailed instructions on how the taxpayer may appeal the decision to the IRS Office of Appeals. Such an appeal of an OIC rejection must be made within 30 days from the date of this letter and the OIC appeals form number 13911 must be used. It’s important for any taxpayer to realize that unless legal grounds exist for the appeal, it is unlikely for an OIC rejection to be overturned.
Return of an Offer
In certain cases, rather than being rejected or accepted, an Offer in Compromise is returned to the taxpayer for some very specific reasons, including:
- Necessary information was not submitted
- The taxpayer filed for bankruptcy
- The taxpayer failed to include a required application fee or nonrefundable payment with the offer
- The taxpayer did not file required tax returns
- The taxpayer failed to pay current tax liabilities during the OIC process
A returned offer is different from a rejection because it opens the door to the problem being resolved and the offer being submitted again. A second application fee of $186 will be required if the offer is submitted again. Moreover, there is no right to appeal when the IRS returns the offer. However, the return of an IRS Offer in Compromise often is positive because the same grounds that the return is based on could be used by the IRS as grounds for the Offer’s rejection. In other words, it’s a moment of grace.
OIC Payment Methodology – Lump Sum Cash Offer
A taxpayer can choose to pay an accepted OIC amount in a lump sum or installment payments. It’s important to understand that a lump sum cash offer does not only mean a single one-time payment to the IRS. Rather, a lump sum cash offer is defined by the Internal Revenue Service as an IRS Offer in Compromise payment plan that is payable in 5 or fewer installments within 5 or fewer months after the IRS Offer in Compromise has been accepted.
If a taxpayer chooses to the lump sum cash offer, Form 656 must be included in the OIC process with a nonrefundable payment equal to twenty percent of the offer amount. Such a payment does not include the $186 application fee, which must be as well. The twenty percent payment is nonrefundable, meaning it won’t be returned to the taxpayer even if the offer is rejected or returned to the taxpayer without acceptance. Instead, the twenty percent payment will be applied to the taxpayer’s tax liability
OIC Payment Methodology – Periodic Payment Offer
As opposed to a lump sum cash offer, periodic payment offer is payable in six or more monthly installments within twenty-four months after the IRS Offer in Compromise is accepted. Upon submitting a periodic payment offer, in addition to the $186 application fee, the taxpayer must include the first proposed installment payment along with the Form 656. Like the lump sum cash offer initial payment, this amount is nonrefundable. Moreover, the taxpayer must continue to make the installment payments provided for under the terms of the offer while the IRS is evaluating the periodic payment offer, regardless of how long the evaluation takes. Such payments are also nonrefundable. These amounts are applied to the tax liabilities, and the taxpayer has a right to specify the particular tax liabilities to which the periodic payments will be applied. Upon acceptance of a periodic payment plan for an IRS Offer in Compromise, however, the taxpayer may no longer designate offer payments to any specific tax liability. Instead, the IRS takes control and makes all such designations.
IRS Offer in Compromise and IRS Bank Levy or IRS Tax Lien
As stated above, whether accepted or rejected, an IRS Offer in Compromise will not affect an IRS tax lien. The IRS tax lien will remain in effect until the full amount of the IRS Offer in Compromise has been paid in full. Once this has been accomplished, the taxpayer should request that the IRS remove the tax lien.
In contrast to an IRS tax lien, under section 301.7122(g) of the US Federal Tax Regulations, an IRS Offer in Compromise will stop tax levies. That regulation states that the IRS will not levy upon a taxpayer’s property while a valid IRS Offer in Compromise has been accepted for processing and is pending. Even if the IRS Offer in Compromise is rejected, the IRS cannot implement a bank levy for thirty days after the rejection. Moreover, if the taxpayer appeals the OIC rejection, the IRS cannot levy while the appeals process is ongoing. However, if an IRS tax levy or bank levy is in place when an IRS Offer in Compromise is first submitted, it is not automatically released.
The Support of a Tax Resolution Specialist
Given the complexities of an IRS Offer in Compromise, the qualified support of a tax resolution specialist is required. As opposed to the empty promises scam artists on late night television offering “pennies on the dollar,” you need the help of a proven professional with a track record of both experience and expertise. To learn more about doing such due diligence, please contact the Tax Resolution Institute today.