Drowning in tax debt can take a toll on anyone. It may seem impossible to get out of the present tax hole you are in, but fortunately, there is a way to lighten the burden. The remedy: Offer in Compromise (OIC). An OIC is a program administered by the Internal Revenue Service to provide people with the opportunity to relinquish their debt for substantially less than they owe. The OIC invariably gives people the chance to have a clean slate.
Though the IRS is not obligated to accept the OIC, they try and work with people. Every OIC claim, at the very least, will get a chance to be reviewed. In recent years they have accepted up to 40 percent of claims—a staggering number considering the rates in previous years.
Who Should Submit an Offer in Compromise
The OIC was established to help taxpayers with their debit under a substantially lower amount than previously owned. Most people who are straddled with debt can’t ameliorate their situation without the help of either the government or someone else, especially when it comes to extreme cases.
Who is Eligible for an OIC?
The first step in attempting to secure OIC status involves submitting an application demonstrating financial challenges. There are two ways that the IRS will approve the offer.
If the IRS determines that they won’t be able to collect the debt from you. The IRS defines this as “doubt as to collectability.” Or, because of extreme conditions, you are not able to pay deeming it unjust to require you to.
The other, more difficult thing for an applicant to prove is called doubt as to liability. Taxpayers seeking to go this route must file Form 656-L. This offer is based on there being a sort of doubt about whether or not the debt is just or not.
The IRS recommends you use its online pre-qualifier tool to determine whether you are eligible to make an offer in compromise.
It’s important to remember that this status is only temporary, and the taxpayer’s income will be frequently under review to ensure that they still cannot afford to pay their tax debt.
Process for Receiving OIC
The first step in securing an OIC is submitting IRS form 656. There’s a $186 fee for submitting the application. You can circumvent the fee if you are living below the poverty level, but you have to fill out an Application Fee Worksheet from the form 656 booklet.
Secondly, you need to provide a financial overview to the IRS with Form 433-A—for individuals—and Form 433-B—for businesses. For those who are married, the IRS will require a Collection Information Statement to receive information on your partner. It’s important that you spend a good amount of time filing out this form as the IRS will by steadfast in checking the information.
The process for getting approved is rigorous. The IRS isn’t going to just give anybody the OIC and there’s a myriad of factors determining whether or not you could get it—mainly whether or not the person can pay in the future.
Again, make sure that you take care to thoroughly submit the OIC. When you are filling out the applications, you should try to make sure that you are hitting the following benchmarks.
First, determine that you are not missing any tax returns. The IRS will start by checking to make sure that you, the applicant, is up to date on all returns. Any missing returns will disqualify the candidate from the program. As of March 2017, all OIC applications will be rejected outright if the requisite returns aren’t filed. If so, the applicant will receive the application fee back.
Second, the IRS will execute a review of the client’s finances in comparison to the total debt owed. Before you even submit the application, make sure you review your finances to make sure that you can receive this deal. The important part is to look over the Collection Financial Standards on the IRS website to compare your client’s income and expenses.
Last, you need to contact the agent in the IRS who is conducting the review. You are allowed to submit the application over the phone with the IRS and get questions answered for you by the agent. That’s the best plan of action because they can help address any concerns or discrepancies you have in the moment.
How Much Should You Offer to Pay?
Form 433 outlines how much you will need to come up with an initial offer. In short, your offer has to equal the net value of your assets and your monthly income. All the instructions are on Form 433 to help you come up with an offer.
If you find out after calculating your asset value that there’s no way to pay off the debt, don’t be alarmed. You just need to make an offer. The IRS is allowed to accept less money, just make sure that you give them something to work with.
That said, the IRS grants help for individuals who deal with physical or psychological issues. Specifically, the IRS gives breaks to those who are in tough financial situations because of age and will strongly consider someone with drug or alcohol related issues.
If you really want to seize the IRS’s attention, then submit a letter to Form 433-A. You don’t need to write some wild novel or tear-jerking letter, just a brief outlining your situation and hardship. You will also have to provide information from a doctor to prove your status. If your medical information doesn’t clearly show your peril, make sure you explain in your letter.
What Happens if it’s Rejected?
If you find that your OIC is rejected, you can submit an appeal within 30 days of rejection; the appeal can be submitted through Form 13711. In the appeal letter, you need to make sure you comment on the rational for rejection brought up by the OIC rejection. If the appeal is accepted, the applicant can renegotiate their rejected offer.
How Long Does an Offer in Compromise Take to Process
The length of time the compromise process takes depends on the situation, but the bulk of OICs get processed after several months. There is no guaranteed timeframe that the IRS has to finish the application. It can take the IRS up to 7 months to finish the request, regardless of acceptance or rejection.
In the process, applicants can and should make payments to their existing plan and the plan detailed in the request. You may receive penalties during the period, but generally they pause the collection in this period.
Should I File My Offer Alone?
Filing an OIC can prove very stressful for one person. It would be best to hire a tax professional to help you in the process if you can afford it. The paperwork and stress are just generally too much for someone—especially someone inexperienced with tax protocol.
The IRS doesn’t help the process or make it easier on individuals, but a tax professional can help lighten the load and offer guidance in determining the best actions to take to get accepted.
How Do I Pay an Offer in Compromise
You will have myriad payment options to implement if your OIC is accepted. Your payment plan must be outlined at the onset of getting the offer and should include a lump sum payment and payment schedule. Your tax professional can help you figure out what plan is best.
What Happens if I Owe Back Taxes?
Not every state provides people with OIC deals to mitigate their back taxes and the requirements are usually different than the federal government. If you need to file an OIC with the state, you need to do it separately. If your IRS OIC receives approval, then your state will more likely get accepted as well.
Can I Default on my Offer in Compromise?
Yes. If you get accepted, you are expected to file your taxes and keep up to date with payments for at least five years. If you can’t do that, you would get an OIC default and would be responsible for the debt and any fees and penalties built up over time.
If the IRS accepts the applicant’s offer, they will accept that the applicant has no other issues with the law or taxes and that they comply with tax laws. If the applicant doesn’t follow the terms, their OIC can get defaulted.
If the IRS defaults on the agreement, they can collect the amount owed along with interest and penalties. Also, the refunds applicable will be due in the year where the offer was accepted and originally applied to the debt.
Filing an OIC is a complicated process, but in the end it can be very worth it to help mitigate the financial burden. The best the thing you can do is find a tax professional and get the help you need to start fresh again.