OFFER IN COMPROMISE
If you find yourself in a situation where you owe money to the IRS that you can’t pay in full, there are several options available to you. One is an Offer in Compromise or an OIC, through which you offer to pay the IRS less than the total you owe. The IRS considers OICs on a case-by-case basis by looking at the following:
- Your gross income
- The amount of your expenses
- Your asset equity
- Whether paying your debt in full creates a financial hardship
Before the IRS can consider your application for an Offer in Compromise, you must have explored all other options for repaying your tax debt, including submitting a payment plan.
If you think you’ll qualify for an Offer in Compromise, then G-Tax can pre-qualify you, confirm your eligibility and put a proposal together for you.
To make its determination, the IRS requires a full financial workup of your situation to fully assess your ability to pay. Submitting an Offer in Compromise can be complex and time-consuming. You need knowledgeable tax accountants on your side to not only complete the paperwork but also to:
- Help you understand the process
- Make sure an Offer in Compromise is your best alternative
- Educate you about possible repercussions
- Keep your interests and goals front and center
G-Tax have experienced tax accountants to pull everything together. They confirm your eligibility and generally take the stress out of the situation. They even represent you to the IRS, so you don’t have to talk to them yourself. In fact, you should direct all IRS attempts to contact to your tax expert. G-Tax recommends that you not speak directly with an IRS agent.
DO YOU QUALIFY?
As with all requests to the IRS that involve large debt, you must be current on all other tax returns, except for the year in which you’re requesting an Offer in Compromise. If you own a business, all your business taxes for the quarter must be paid and current. You may not be in the process of filing for bankruptcy — because if you are, all your government debts must be included in your bankruptcy filing.
The government expects that you’ve already done the common things to raise money — things like liquidating assets where appropriate, selling off stocks and bonds (but not from your retirement account) and selling extra vehicles or even homes — to try to pay your debt. You have to do everything humanly possible before you apply for any kind of plan or settlement.
WHAT THE IRS WANTS
The IRS prefers you pay your tax debt in full and in a lump sum. If your financial statement shows you can do that by selling off some of your assets, the IRS rejects your OIC quickly. If, however, you can show that paying in full would cause an economic hardship, where you can show that paying your debt would leave you unable to pay for your basic living expenses, the IRS could agree and approve your OIC.
The only other circumstance that may cause the IRS to consider an Offer in Compromise is if the amount you owe is somehow in doubt. This is a rare occurrence and can usually be sorted out rather quickly. In the meantime, make payments on your tax liability balance, as specified by the IRS, until the correct amount is verified.
CALCULATING YOUR MINIMUM OFFER
If you still think you’ll qualify for an OIC, then G-Tax can pre-qualify you, confirm your eligibility and put a proposal together for you. Pre-qualification involves reviewing your financial situation as thoroughly as if they were performing an audit. Once your tax expert agrees that an Offer in Compromise may be successful, you’ll need to determine the amount to propose for the IRS settlement.
The formula for figuring out the lowest percentage of the total debt owed that the IRS may accept looks something like this:
- The net realizable value of your assets + (your monthly income – your monthly expenses) = Your Offer in Compromise.
- Take that total and multiply it by the number of months in your repayment period, normally 12 or 24.
All payment plans and requests for debt assistance require an application fee. Offers in Compromise are no exception. You must pay a non-refundable $186 application fee, as well as an initial payment. You can choose how to settle that initial payment:
- Lump Sum Cash allows you to pay a percentage — often 20 percent — of the total amount you are offering to pay. This payment isn’t refundable. If your offer is accepted in writing from the IRS, you’re expected to pay the remaining balance. The IRS allows you to do this with as many as five payments.
- Periodic Payment requires you to submit an initial payment — which is again non-refundable — and to continue paying the IRS that amount every month until you get written confirmation of acceptance. At that time, you can continue to make monthly payments until the amount proposed is paid in full.
IRS ACCEPTANCE GUIDELINES
Getting an Offer in Compromise accepted relies on three things:
- Doubt of Liability. In this case, you have a genuine and vigorous dispute about either the amount of the debt or whether you owe the debt at all. If this is the case, you don’t have to pay the application fee.
- Doubt as to Collectibility (DATC). In this instance, your income plus your assets aren’t enough to cover the full amount you owe.
- Effective Tax Administration (ETA). If this is the case, the IRS is sure the debt is yours and the amount owed is correct; however, paying the debt in full would mean an economic hardship. You may not have to pay the application fee in certain cases.
AFTER YOU SUBMIT YOUR OFFER
If the IRS rejects your OIC, you have 30 days to file an appeal. While you’re in the midst of this process, the IRS won’t pursue collections efforts, not even during the 30-day appeals window. Rejections, delivered by mail, come with explanations for the rejection.
Be aware that even if you have an accepted OIC, the IRS may still take part or all of your federal tax return every year and apply it to the balance owed. For OICs accepted under DATC or ETA, you’re required to pay all taxes on time and to file your tax returns on time every year for the next five years. If you don’t, or if you miss a payment on your OIC agreement, the IRS can declare you in default and come after you for the full amount of the balance owed, including all penalties and interest.
