What to Do When You Owe the IRS: The Offer in Compromise
The IRS Offer in Compromise (OIC) program is the most misunderstood, misrepresented, and abused tax debt resolution program in history. It reached nearly mythic status with late-night television ads promising to settle your tax debt for pennies on the dollar, and then crashing to earth when the government stepped in to shut down companies they alleged were “scams.”
The purpose of this web page is to separate myth from reality and explain the IRS Offer in Compromise program in a simple and straightforward way.
The IRS Offer in Compromise program allows you to settle your IRS tax debt for less than the full amount if 1) you can’t afford to pay the debt in full; 2) your assets are significantly less than the debt; and 3) you convince the IRS that they can’t collect the debt in full in the future.
The intent of the program is that you offer something to the IRS that they could not otherwise take from you. For example, you might borrow money from a family member to settle your tax debt. Offers will not be considered if the liability can be paid in full as a lump sum or under an Installment Agreement.
First, it is said that you can’t afford to pay the debt in full when you do not have the money to pay all at once, and can’t make monthly payments over the statute of limitations, that will satisfy the debt. Your ability to pay is based on your income when compared to your allowed expenses, as well as cash in any bank accounts, retirement accounts, cash-value life insurance policies, money in investment/brokerage accounts, etc.
Note: The IRS has about 10 years to collect from you once you file your returns or the tax debt is “assessed” (usually as result of an audit). Once this period has expired, most tax debt is eliminated. This 10-year period is called the “statute of limitations.”
Second, your assets must be significantly less that the debt you owe to the IRS. These assets include the equity in real estate, automobiles, boats, etc. Basically, your assets are said to be less than your tax debt if, in the case you sold/liquidated everything you own, you still wouldn’t be close to paying off the IRS.
Finally, you must convince the IRS that they will not be able to collect from you in the future. This means that you must show that your income will not increase and that other circumstances will remain the same, making it impossible for you to pay the debt.
For example, if you are unemployed you do not qualify for an Offer in Compromise. The IRS will simply wait until you find employment and then make a determination on how much, if any, they can take from you.
Another common example in today’s tough economic times is someone who made good money in prior years, but whose salary has decreased significantly. In most cases, the IRS will wait a year or two to see if your situation improves before granting an Offer in Compromise. In other words, you may need two or three years of similar income before an OIC will be granted.
The Offer in Compromise Program is summarized in the following IRS policy statement:
“The Service will accept an Offer in Comprise when it is unlikely that the tax liability can be collected in full and the amount offered reasonably reflects collection potential. An Offer in Compromise is a legitimate alternative to declaring a case as currently not collectable or to a protracted Installment Agreement. The goal is to achieve collection of what is potentially collectable at the earliest possible time and at the least cost to the government.”
Most people do not have the skills or knowledge of the IRS collection process to prepare and document an Offer in Compromise that is in their best interest. Informal IRS estimates in Southern California for 2010 indicate that 75% of Offers in Compromise are returned due to forms being filled out incorrectly and that, of the 25% that are processed, approximately 50% of them are rejected.
The keys to a successful IRS Offer in Compromise are 1) a proper analysis of your tax situation, including a review of your income, expenses, and financial documents, and 2) a complete and accurate Offer in Compromise package.
Note: A proper analysis often shows that you do not qualify for an Offer in Compromise. Therefore, forms and instructions are produced to set up an Installment Agreement or to list you as “temporarily uncollectable.”
There were approximately 52,000 Offers in Compromise processed in 2009, and about 11,000, or 26%, of those were accepted. This compares to the height of the Offer in Compromise boom in 2004, when approximately 100,000 OICs were filed.
There are hundreds of IRS agents assigned to work these thousands of Offers in Compromise, and they must treat all taxpayers the same. This means that the Offer in Compromise program is very mechanical,with agents following strict guidelines and mathematical formulas to determine acceptance or rejection.
In most cases, an IRS agent receives the OIC package, researches the accuracy of the information provided, looks at prior-year income history, potential future earnings, and accepts or rejects the Offer in Compromise. Almost zero negotiation goes into this process. The only communication one is likely to get from the IRS during an OIC is a request for additional information or documents.
A typical Offer in Compromise requires:
- IRS Form 656 – Offer in Compromise Booklet and Form;
- Form 433-A – Collection Information Statement for Wage Earners and Self-Employed Individuals;
- Form 433-B – Collection Information Statement for Businesses;
- Supporting documentation: You will need three months of documentation on just about every expense and income you have. These amounts include pay stubs, credit card statements, mortgage or rent statements, investments, transportation, W-2s, tax returns, etc.
By preparing these documents correctly and properly researching the Offer prior to submission you are guaranteed of the best possible result.
What If I Don’t Qualify for an Offer in Compromise?
Most clients who contact us for tax relief do not qualify for an Offer in Compromise. Therefore, we assist them to set up an Installment Agreement, to be listed as “temporarily uncollectable,” or with one of the many other solutions available.
All forms of tax relief require the same steps and documentation:
- Filing all tax returns;
- A proper analysis of your tax situation to determine the best course of action;
- Planning and accounting in order to prepare an IRS financial statement, Form 433-A and/or 433-B when applicable;
- A complete and accurate IRS financial statement, Form 433-A and/or 433-B; and
- Supporting documents which match the information reported on the IRS financial statement(s).
Therefore, the key to successfully dealing with the IRS is to submit a complete, well-planned, and detailed package of information. This, combined with our unlimited phone and Internet support, guarantees you the best result possible.
Once you understand the intent and structured nature of the IRS Offer in Compromise program, as well as all other forms of tax relief, dealing with the IRS becomes much less scary, and it is easier to move forward toward resolving your IRS tax debt.
Keep in mind that the IRS’s objectives for the Offer in Compromise program are:
- To effect collection of what would reasonably be collected at the earliest time possible and at the least cost to the government;
- To resolve accounts receivable in the best interest of both the taxpayer and the government;
- To give taxpayers a fresh start to enable them to voluntarily comply with all filing and paying requirements;
- To collect funds which may not be collected through any other means.
If you qualify for an Offer in Compromise, you will eliminate your debt permanently and gain a fresh start with the Internal Revenue Service. If you do not qualify, you will prevent levies and other hostile actions from the IRS by dealing with the situation head-on through the Installment Agreement program, or one of the many other options or variations available.
Premier Tax & Corporate, Inc., LLC will analyze your case, determine your best course of action, prepare your forms, review your supporting documents, send you a completed package reviewed by a tax attorney and an enrolled agent, and prepare a custom-made, detailed letter of instruction. We will also support you throughout the process by phone and online chat.
Put our decades of IRS experience to work for you and get great results. Pleaseclick here to get started now, call one of our experienced and licensed tax professionals at (800) 581-6715/(213) 985-1876 to discuss your case, or click here to send us an e-mail.