5 Things You Should Know About An Offer In Compromise To Settle Your Debt
It is sometimes possible to wipe your tax slate clean at an enormous discount. If you qualify for something known as the Offer In Compromise, referred to as an "offer" or "OIC," the IRS will accept less than the amount a taxpayer owes on a tax bill and call it even.
1) Understanding if you may qualify for an OIC
Merely wanting to make a deal with the IRS is not enough -- everyone would like to have his tax bill reduced. To qualify for OIC consideration, you must show the IRS that one of the following conditions exists:
- there is some doubt as to whether the IRS can collect the tax bill from you -- now or in the foreseeable future. The IRS calls this "doubt as to collectibility."
- due to exceptional circumstances, payment of your full tax bill would cause an "economic hardship" or would be "unfair" or "inequitable."
There is another more rarely used ground: "Doubt as to Liability." This offer is based on a claim that there is doubt as to whether the tax liability assessed is correct. This is an unusual and more difficult avenue to pursue.
The IRS recommends you use its online pre-qualifier tool to determine whether you are eligible to make an offer in compromise.
2) The OIC Process
Submitting an offer to the IRS is a formal process -- you can't simply call the IRS and say "Let's make a deal." You start by completing IRS Form 656, Offer in Compromise. There is a $186 application fee for filing an OIC, which you must attach to Form 656.
As part of the OIC, you must provide detailed financial information to the IRS using Form 433-A (individuals) or Form 433-B (businesses), Collection Information Statement. If you are married and live in a community property state, the IRS may request that your Collection Information Statement includes data on your spouse -- even if you alone owe the IRS. As you can imagine, attention to detail is everything. Even your handwriting will be scrutinized.
Completing the forms is just the beginning. The IRS will ask you for rafts of financial documentation -- pay stubs, bank records, vehicle registrations, and myriad other items. This is an exhaustive, time-consuming process. Some taxpayers wind up submitting boxloads of documents to the IRS to support their OIC request.
In addition, remember that interest keeps accruing during the offer in compromise negotiation process, meaning you'll end up owing more than ever if you don't eventually make a deal.
3) How Much To Offer
You will need to follow the instructions on Form 433 to come up with your minimum offer amount. The IRS is interested in your reasonable collection potential based on the financial disclosures you make in Form 433. Basically, your offer must equal:
- the "net realizable value" of your assets, plus
- your excess monthly income after subtracting your monthly expenses from your monthly income.
You then multiply this amount by 12 or 24 depending on the payment period you choose (either five months or two years). Follow the instructions on Form 433-A (OIC) to compute and show the IRS how you arrived at your minimum offer.
If your offer is accepted, congratulations! However,
4) If Rejected -- Keep Trying
The IRS must give you a written explanation if your offer is not accepted. The IRS usually rejects offers in compromise for one of two reasons:
1) The offer is too low.
2) You are a "notorious character" -- for example, you've been convicted of a serious crime.
If the offer is too low, the IRS letter will state what amount is acceptable. You are also entitled to a copy of the report that lists the factors that caused the rejection. Ask the IRS for a copy. If the IRS won't give it to you, make a request under the Freedom of Information Act.
Your appeal to a rejected Offer in compromise will not be seriously considered unless all of the following are true:
- you furnished all of the data requested by the IRS during your offer processing
- you have filed all past tax returns, and
- you are current on your tax payments for the present year. Self-employed people need to have made all quarterly estimated tax payments; employers must have made all payroll tax filings and deposits.
5) Experts know best
Of course, having a tax lawyer to negotiate with the IRS is a big advantage.
Professional help for tax debt reduction will assist you to explore all available options to get the most reduction in tax debt. As tax debt reduction requires aggressive and skilled negotiation with the IRS, knowledge of tax law and the tax code relevant to the case becomes crucial. For tax debt reduction, especially of a large tax debt amount, it is wise to use expert help to reach a smooth and beneficial resolution.