Donald K.S. Petersen, JD, Harvard Law School
An “Offer in Compromise” (“OIC”) is a great way for people in trouble with the IRS to eliminate thousands-of-dollars in tax debts. It’s an IRS program that lets you pay-off your entire tax debt for less – sometimes substantially less — than the full amount you owe.
For example, suppose the IRS is sending you notice-after-notice-after-notice that it wants you to pay $100,000 in back taxes. You’re scared. You don’t have the money. But you don’t – you really don’t — want the IRS to garnish your wages or take your house.
So you make the IRS a compromise offer you hope it can’t refuse. You fill out the dreaded IRS forms. You put a smile on your face (which is not easy to do after filling out the IRS forms), and you kindly say to the IRS: “Let’s compromise. I’ll give you $10 of the $100,000 that I owe you. You, IRS, write-off the rest ($99,990). That’s fair, isn’t it?”
You wait awhile. You hold your breath. You pray. Then the IRS says, “Sure, we know that we can’t get blood from a rock. Thank you for your kind offer. We’ll happily forgive the balance.”
This sounds too good to be real, but it happens. If you owe $100,000, you may be able to pay $10 and eliminate your IRS debt.
To investigate this further, call an experienced lawyer at George Law, (248) 470-4300.
Offer in Compromise – Reduce the Taxes You Owe!
It’s time to wake up to the power of an OIC. In 2017, the IRS accepted 25,000 of 62,000 proposed Offers-in-Compromise – that’s nearly half, and it amounted to almost $256 million. The average-dollar amount of the offers that the IRS accepted was over $10,000.
Do I Qualify for an Offer-in-Compromise?
We all know how critical taxes are for a smoothly-operating government. So the IRS imposes strict pre-qualifiers that you must satisfy before you’re eligible for a tax settlement. Thankfully, the IRS offers an on-line pre-qualification test. Before you make an offer to the IRS
- take the IRS test to see if you qualify: https://irs.treasury.gov/oic_pre_qualifier/, and
- learn what the IRS will consider before deciding if it will accept your offer.
The first test of eligibility is your reason for requesting a compromise . . .
The IRS considers your OIC only if you’re making the offer for one of these 3 reasons:
- There is doubt as to whether the IRS correctly determined the amount you owe.
- There is doubt as to whether you – i.e., your debt — are collectible; i.e. the amount that you owe the IRS is greater than the combined total of your assets and income.
- The debt is accurate, and you can pay it in full, but doing so would cause you to incur an undue economic hardship. This is called effective-tax administration.
If you’re basing your offer in compromise on reason 2 or 3, the IRS will consider other factors before ruling.
What the IRS considers to see (i) if you have can pay, and (ii) how much you can pay:
- Your ability to pay
- Your income
- Your expenses
- Your assets
Typically, the IRS accepts your offer if it equals the highest amount that you’re able to pay over a reasonable time period.
Finally, the IRS generally will not consider your offer if any of the following are true:
- You filed for bankruptcy, and the case is ongoing.
- You did not file all of your federal-tax returns.
- You did not make required estimated-tax payments.
- You are self-employed, have employees, and did not submit required federal-tax deposits.
As I mentioned above, to find out if you are eligible for an OIC, use the IRS’s pre-qualifier tool.
Even if you do qualify, though, the IRS may not approve your offer. Why? They’re the IRS! We can’t always know what the IRS is going to do.
Indeed, the IRS says the OIC program is not for everyone. It affirmatively suggests that you examine all other payment options before you submit an Offer in Compromise. The IRS will not accept an Offer-in Compromise if (i) you can afford to pay your IRS debt on an installment-payment plan or in other some other way, or (ii) you offer an amount offered that is less than the amount they reasonably expect to collect from you.
The IRS is more likely to accept your offer in compromise if:
- You are retired and on a fixed income.
- You are in legal trouble with the IRS — they would rather settle tax debt that get bogged down in a lawsuit.
- You’re considering filing for bankruptcy, but your unpaid taxes are your major problem.
- You can’t pay your full tax liability, or doing so creates a financial hardship.
- You meet federal low-income guidelines (which aren’t that low anymore!): under $51,950 for a family of three, under $73,550 for a family of five, and so on.
In all of the above cases, the feds weigh your unique facts and circumstances including ability to pay, income, expenses, and asset equity.
What is the lowest you can offer the IRS in an OIC?
Obviously, you want to offer as little as possible. Of course, it’s not that simple. How small of an offer the IRS will accept will depend on your financial condition, and you will need to reveal that in great detail on Form 433-A (individuals/self-employed) or 433-B (for businesses).
How deep into my soul does the IRS dig?
In addition to income and expenses, the IRS wants to know/see a lot of information!
- Proof of your Income/wages
- Bank/Credit-card statements
- Statements-of-Mortgage/real estate you own
- Statements for insurance from the insurance company
- Investment statements
- Health-care-expenses statements
- Childcare expenses
- Household expenses (rents, mortgage records, etc.)
- Transportation expenses or car-loan statements
- Daily expenses (groceries, utility bills, etc.)
- All tax-returns for the years related to the tax debt
- Court-ordered payments (child support, etc.)
- Have you declared bankruptcy?
- If you’re the beneficiary of a trust, estate or life-insurance policy, For how much and when are you likely to get the money?
- Do you have a safe-deposit box? If so, what’s in it?
- What’s in your personal-bank accounts, investment accounts, life-insurance policies that have a cash value, etc.?
- Real estate, personal vehicles and even intangible assets such as licenses, domain names, patents and copyrights that still have value
The IRS expects you to pay your available assets plus 1-2 years’ worth of income that exceeds your expenses. Regardless of your debt and expenses, the IRS will demand you pay something.
Submitting an Offer
When you apply for an offer in compromise, you must submit the IRS forms, pay the $150 application fee, and make the first payment of your offer.
If you offer to pay over the course of a payment plan, your first payment should be the monthly amount suggested in your plan. Make this payment every month until you the IRS notifies you. At that point, if your offer has been accepted, continue making the monthly payments until your balance is paid in full. This must take no more than 24 months after the offer is accepted.
You can choose one of two payment options to pay your OIC:
- Lump-Sum-Cash Offer — You can pay a lump-sum within 5 months after IRS approval. Of course, you must make a (non-refundable!) 20% initial payment with the application.
- Periodic-PaymentOffer – you can pay in installments over 2 years after IRS approval. You have to make the first-proposed payment with the application. If the IRS accepts you OIC, you can make monthly payments. This is sub-divided into 2 categories:
- Short-Term-Periodic Payment– You must pay within 2 years of IRS approval.
- Deferred-Periodic Payment– You must pay during the remaining legal term.
Why would the IRS reject my OIC?
It pays to be meticulous. Common reasons for the IRS rejecting your OIC include:
- Your offer is too low. The IRS concludes that you can pay-in-full out of future earnings.
- You fail to provide enough information substantiating your financial condition.
- You are missing current tax payments. The IRS views you as a poor risk to pay the OIC.
- You’ve been convicted of a serious crime.
Options for Rejected Offers
The IRS accepts less than half the OIC it receives; it’s likely the IRS will reject your OIC. What do you do after IRS rejection?
You can resubmit your offer. If you do it within 30 days, all you need is a letter that increases the amount of money you’re offering.
If you wait longer or significantly change your offer, you have to fill out a new Form 656.
To appeal the rejection, file Form 13711 within 30 days of the rejection letter, identifying what parts of the rejection you dispute and providing your reasons.
What Are the Downsides of an OIC?
Providing that information that the IRS demands is unpleasant. Plus, the process can take up to a year, and another several months if you appeal.
You must remain compliant on all your taxes for five years before the OIC becomes final, and even a little slip-up gives the IRS the right to revoke the agreement and demand full payment of the liability you thought you’d avoided.
An OIC also suspends the 10-year statute of limitations the IRS has to collect taxes from you. If it’s been six years since the IRS assessed taxes against you, it has four years left to collect. If it takes a year for the IRS to reject your OIC, the IRS still has four years to collect against you.
Consider Hiring an Attorney
Dealing with the IRS is never fun. It’s always better to have a trained professional on your side. Call an expert at George Law to assist you. Call (248) 470-4300.