IRS Offer in Compromise

 

The IRS Offer in Compromise (OIC) program is a tax settlement program that allows qualified taxpayers to settle their back tax debt for less than the full amount owed.  Of course this is quite attractive on its face, but most people don’t understand the requirements of the program and many do not qualify to participate.  Nonetheless, this can be the best debt resolution solution for those that qualify.

Buyer Beware

Unfortunately several tax resolution firms have taken advantage of the confusion and misunderstanding surrounding this program by leading people to believe that they are qualified for this program based on a phone call with a salesman masquerading as an experienced tax professional.  I’m sure you’ve seen the ads: “Settle your tax debt for pennies on the dollar. Call Now.”   A number of these firms have been prosecuted and are now defunct.  Others, while still operating, have been successfully sued or had to settle with the State Attorney Generals in many states.  And there are still others who have been profiled in the news.

This is a complex and tricky area and it requires access to a wide variety of personal and financial information as well as an in-depth understanding of how the IRS operates to establish who might qualify for this program.

Who Qualifies for Offer in Compromise and Other Important Considerations

There are three reasons why you may ask to be accepted into this program:

• Doubt as to Collectability –This means that the assessed back tax is correct, but you do not have the money, assets, or other resources to pay 100% of your tax debt by the time the statute of limitations expires on your debt.  This is the most common reason used to justify an IRS tax settlement.
• Doubt as to Liability - This means that doubt exists that your assessed back tax debt is correct. Possible reasons to submit an Offer in Compromise with this justification are that you have new or additional evidence to show you don’t owe the back tax debt or an examiner either did not consider your evidence or made a mistake in interpreting the law with your evidence.
• Exceptional Circumstances (Effective Tax Administration) – This means the back tax assessment is correct and you may have the resources to pay the tax, but using  your financial resources to pay the back taxes would create an exceptional hardship and hinder your ability to obtain necessary living expenses . This may occur when a taxpayer, or one of his immediate family members that he supports, has serious and immediate medical or special needs, or where a person’s income and standard of living are below the national poverty line.

Regardless of which reason you use to be accepted into the program, the IRS will ask for substantiating documentation to support your case along with the completion of several forms and schedules.

Many taxpayers confuse a typical consumer debt settlement process with the IRS program. Consumer debt settlement negotiations focus on payment history, while the IRS Offer in Compromise program determines how much you can pay, when you can pay, and for how long.   Your ability to pay is a combination of your disposable income plus the value that can be realized from equity in property, such as automobiles, bank accounts, savings and retirement accounts and any anticipated future disposable income. Disposable income is total gross monthly income less your actual living expenses adjusted for national and local allowable standards. This combination of your calculated monthly disposable income plus the equity that may be available from your other property is known as the Reasonable Collection Potential (RCP).

Reasonable Collection Potential

The IRS considers all income above necessary living expenses for the next 4 to 5 years and the amount of money you could receive from the sale of property as available to pay towards your tax debt.  The realizable value of monetary assets such as bank accounts, investments or investment accounts, whole life insurance cash equivalents, accounts / notes receivable, and cash on hand are included at full face value towards what you can pay.

• Equity in other assets, including property, vehicles, personal assets such as furniture, and business assets are discounted 20% to represent what you might receive in Quick Sale Value (QSV), meaning within 90 days. For example: you have $80,000 loan left on your mortgage and your homes’ Fair Market Value (FMV) is $110,000. Multiplying the FMV by 80% ($88,000) minus the loan amount ($80,000) = $8,000 in QSV equity in your home.
• Monthly gross income (before expenses and taxes) includes wages, interest, dividends, annuity payments, pensions, social security, child support and alimony received, Schedule C net profit, Schedule E Rents and Royalties, and K-1 distributions. The IRS will reduce this income by your actual monthly expenses and IRS standard of living amounts to arrive at Monthly Disposable Income (MDI).  This will be the amount of “monthly payments” the IRS would expect to receive if they attached (garnished) your wages or you were on an installment agreement.

You should always seek professional assistance when submitting an OIC to ensure that: A) you qualify, B) you offer at least the RCP, and C) your position is negotiated knowledgeably and fairly with an IRS Offer Examiner.

Other Factors to Consider with the Offer in Compromise Program

• While a tax settlement through the IRS Offer in Compromise program is a very attractive option due to perceived potential tax savings, the Offer in Compromise is a marathon race, not a sprint. The IRS usually takes three months just to acknowledge an Offer in Compromise, and approximately 6-9 months for the IRS to render a decision; however, the IRS states that they have up to two years to consider a tax settlement. So, it is not a quick, easy solution.
• Secondly, there are fees and down payments to consider. The IRS charges $150 to submit an Offer in Compromise along with a 20% good faith down payment on the offer.  So for example: If you have are making a $10,000 offer to settle a much larger tax debt, you have to submit $2,150 with your offer just to get your offer considered by the IRS.
• Most taxpayers submitting an Offer in Compromise fail to realize that their offer amount must be paid within 5 months after IRS acceptance of the tax settlement for a cash-option OIC . While other options exist to make deferred payments for the remainder of the statute of limitations period, penalties and interest accrue until the offer is paid in full.
• You must file all tax returns due by April 15^th for 5 years after your back tax settlement is accepted, or you will default on the agreement, and the IRS can attempt to collect the original tax debt plus any accrued penalties and interest.
• Any new tax debts must be paid in full on or before the filing deadline for the next 5 years or your tax settlement agreement will also default.
• The IRS will keep all refunds due for the year the tax settlement is accepted and any years prior.  These will not be applied to the settlement amount and you should consider this prior to submitting an Offer in Compromise.

Part Science and Part Art

An Offer in Compromise is part science and part art. The science is the mathematical formula the IRS uses to determine your reasonable Collection Potential (RCP) as described above. The art is the negotiations that occur around the many elements that make up the tax settlement as they relate to your financial and personal situation.  It is important to have a seasoned professional advise you and work on the “art of the possible.”

Although the Offer in Compromise process is complex, lengthy, and often involves negotiations, it is the best solution for certain taxpayers who meet the qualification criteria. To find out if the IRS Offer in Compromise program might be right for you, fill out our free Consultation Form or call us at 1-855-375-5400 to speak with a tax professional.