IRS Offer in Compromise
You owe the IRS money and you’ve seen some of the late-night commercials telling you that if you call an 800 number, they can settle your tax debt for pennies on the dollar. Is that true? Maybe.
The IRS Offer and Compromise (OIC) program does exist and some people qualify for the program. In 2010, the OIC acceptance rate was 26%. In 2011, it was 39%. A fair jump, but by no means do the majority of OIC applications get accepted. If your tax liability can be settled through an installment agreement or by some other means, you will not qualify for an OIC. To be eligible for an OIC, you:
must have filed all tax returns,
made all required estimated tax payments for the current year, and
made all required federal tax deposits for the current quarter if you are a business owner with employees.
The IRS does not accept OICs simply because you would like to pay less. They consider your reasonable collection potential (RCP) when evaluating an OIC. This is what the IRS considers to be your ability to pay. They look at things like your assets, such as real property, automobiles, bank accounts, and other property. The IRS also considers anticipated future income, less certain amounts allowed for basic living expenses.
The IRS may accept an OIC based on three grounds.
First, acceptance is permitted if there is doubt as to liability. This ground is only met when genuine doubt exists under the law as to whether or not the IRS has correctly determined the amount owed.
Second, acceptance is permitted if there is doubt that the amount owed is fully collectible. This means that doubt as to collectability exists in any case where your assets and income are less than the full amount of the tax liability.
Third, acceptance is permitted based on effective tax administration. An offer may be accepted based on effective tax administration 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 either create an economic hardship or would be unfair and inequitable because of exceptional circumstances.
Many OICs are based on the second ground, doubt as to collectability. There are specific forms to submit when asking for an OIC. There is also a fee of $150 involved in addition to any tax that is being paid when submitting the forms. There are some very limited exceptions that allow the fee to be waived.
When making an OIC to the IRS, you may choose to pay the offer amount in a lump sum or in installment payments. A “lump sum offer” is an offer payable in 5 or fewer payments and within 24 months after the offer is accepted. If you submit a lump sum offer, you must include a nonrefundable payment equal to 20 percent of the offer amount in addition to the $150 fee. The 20 percent amount will not be returned to you even if the offer is rejected or returned to you without acceptance. The 20 percent amount will be applied to your tax liability.
An offer is called a “periodic payment offer” under the tax law if it is payable in 6 or more monthly payments and within 24 months after the offer is accepted. All OICs must be paid in full within 24 months of the offer being accepted. When submitting a periodic payment offer, you must include the first proposed installment payment with the offer. This payment is required in addition to the $150 application fee. This amount is nonrefundable, just like the 20 percent payment required for a lump sum offer. Also, while the IRS is evaluating a periodic payment offer, you must continue to make the installment payments provided for under the terms of the offer. These amounts are also nonrefundable and are applied to the tax liabilities.
If you file an OIC and it is accepted, the IRS expects that you will “remain current.” This means that you will have no further delinquencies and will fully comply with the tax laws. If you do not live up to all the terms and conditions of the OIC, the IRS may determine that the OIC is in default. For doubt as to collectability and effective tax administration OICs, the terms and conditions include a requirement that you timely file all tax returns and timely pay all taxes for 5 years from the date that the OIC is accepted. When an OIC is declared to be in default, the agreement is no longer in effect and the IRS may then collect the amounts you originally owed, plus interest and penalties. They will also take any of your refunds due within the calendar year in which the offer is accepted and applied them to the tax debt.
If the IRS rejects your OIC, you will be notified by mail. The letter will explain the reason that the IRS rejected your offer and will provide detailed instructions on how you may appeal the decision to the IRS Office of Appeals. The appeal must be made within 30 days from the date of the letter.
During 2012, the IRS made some important changes to the OIC rules. Here is a summary of the changes:
The IRS will now look at only one year (instead of four years) of future income for offers paid in five or fewer months; and two years (instead of five years) of future income for offers paid in six to 24 months.
Minimum payments on student loans guaranteed by the federal government will be allowed for the taxpayer’s post-high school education.
When a taxpayer owes delinquent federal and state or local taxes, and does not have the ability to fully pay the liabilities, monthly payments to state taxing authorities may be allowed in certain circumstances.
Standard allowances use average expenses for basic necessities for people living in similar geographic areas. These standards are used when evaluating installment agreement and OIC requests. The National Standard miscellaneous allowance has been expanded. Taxpayers can use the allowance to cover expenses such as credit card payments and bank fees and charges.
There are many moving parts to think about when considering making an offer in compromise. Serious consideration should be given to using a professional who has experience with OICs and can speak to and negotiate with the IRS on your behalf. If you think you qualify for an OIC or would like assistance with the best path to take in dealing with your tax liability, call Scott H. Novak, Attorney at Law, today.