When dealing with the IRS, you may have heard of the Offer in Compromise as a tax settlement option. Yet many individual and business taxpayers don't really know what it pertains to. Understanding the basics of the offer in compromise program will help you determine if it is something you should investigate further.
What is an Offer in Compromise?
If you aren't familiar with the term, an Offer in Compromise is also referred to as an OIC. It is a type of agreement that a taxpayer can make with the IRS. It basically enables the taxpayer to settle their tax debt that they owe for less than the original full amount. This is often only considered and accepted by the IRS though if they feel that the taxpayer can't pay it as a lump sum or in installments.
Types of Offer in Compromise
There are three types of offer in Compromise that the IRS may accept on the behalf of a taxpayer:
Doubt as to Collectibility - There is very little reason to believe that the taxpayer could ever reasonably pay that tax liability. For example when the monthly expenses of the taxpayer exceed their monthly income. In such a scenario, the IRS would also be looking at the potential for future income to base their decision upon.
Doubt as to Liability - This particular Offer in Compromise has to do with the fact that there is reasonable doubt that the tax liability exists or that it is correct. There are some laws that can be interpreted various ways by the IRS, the taxpayer, and even tax preparers.
Exceptional Circumstances - There are times when the amount of tax due is correct. The taxpayer may have assets, but they may have circumstances beyond their control that they will reasonably need to use those assets for. An example is a terminally ill family member.
How much will the IRS Accept?
There are a series of calculations that the IRS completes before they will accept an Offer in Compromise. What they are trying to determine is if the amount they are willing to accept will be comparable to the cost of collection proceedings against the taxpayer. The Reasonable Collection Potential is referred to as the RCP.
They will be looking at more than just the income of the taxpayer though. The IRS will also be looking at the potential of taking any assets that the taxpayer may own. Of course if there aren't any then they can't reasonably use this method of action. As the saying goes, you can't get blood from a turnip.
OIC Application Process
If you feel that you may be eligible for an Offer in Compromise, then it is a good idea to talk to an enrolled agent or a tax lawyer. They can help you with the application process. You will have to submit the application along with the required fee for filing it. If the fee isn't paid then the application will be denied.
The application fee is $150 and it is non-refundable. This means if your application is denied, you won't get that money back from the IRS. If you aren't able to pay the fee, then you may be able to qualify for the Low Income Certification which will waive the required fee.
Making an Offer
When you submit your application, you are basically making an offer to the IRS. This is why you should consult with a tax relief expert such as an enrolled agent or a tax lawyer. They can help you to complete an offer that is right for your circumstances. At the same time, they can help you to submit an Offer in Compromise that is highly likely to be accepted by the IRS.
There are two payment options that you can consider with the Offer in Compromise. The first one involves the amount that you are offering to pay being divided up into 5 or fewer monthly installments. At least 20% of the offer amount must accompany the application.
The second option is to offer an amount that will be paid in more than 5 monthly payments. The first payment must accompany the application. In either of these payment options, a missed monthly installment is reason to void out the Offer in Compromise that the IRS has accepted.
Mike Habib, EA is an IRS licensed Enrolled Agent and focuses his tax practice on resolving his clients tax debt through various tax relief options such as OICs offer in compromise; he has the tax relief experience and specialized skill set to assist you. You can reach him directly at 1-877-788-2937.