As the world's most powerful collection agency, the IRS has several methods and resources to collect money from delinquent taxpayers. Some enforced collection actions include summonses for information or evidence of an individual's financial situation, property seizures, liens, levies and garnishments.
Additionally, penalties and interest continue to accrue on all debts owed. For most people, a substantial and outstanding tax liability can quickly increase to an unmanageable amount that may be difficult to resolve.
Offer in Compromise (OIC) is an IRS program that allows a taxpayer to settle his/her delinquent taxes for less than the total amount the IRS claims is owed. If the IRS determines that a taxpayer cannot fully pay his/her tax debt, it may be willing to settle that tax debt for less than what is allegedly owed. Conversely, if the IRS determines that a taxpayer has the ability to pay all of the tax debt, it will not be interested in settling that tax debt on the basis of what it calls "doubt as to collectibility."
Although this program may sound too good to be true, it's legitimate. However, not all people will qualify for an Offer in Compromise, and all offers made must be reasonable and reflect an accurate assessment of what the IRS can expect to collect within 24 months.
In order to qualify to submit an offer, you must first be in current compliance with IRS requirements, including:
- Filing all tax returns that you are legally required to file
- Making all required estimated tax payments for the current year (for those who are required to do so)
- Making all required federal tax deposits for the current quarter if you are a business owner with employees
If you meet the conditions listed above and submit the necessary paperwork for an Offer in Compromise, the IRS will evaluate your financial circumstances and ability to pay based on its assessment of your household's income and expenses and the total equity of your assets. For this, you must submit the following:
- Application Form 656
- Collection Information Statement Form 433-A (OIC) (individuals) and/or 433-B (OIC) (businesses) with all required documentation as specified on the forms
- A nonrefundable $150 application fee
- A nonrefundable initial payment for each Form 656
Your initial payment will vary based on the amount of your offer and the payment option you choose. The IRS offers the following payment options for an Offer in Compromise:
- If you choose to make a lump sum offer, you must submit an initial payment of 20 percent of the total offer amount. The remaining 80 percent of your balance must be paid in five or fewer payments within 24 months of the date your offer is accepted.
- If you cannot make a lump sum offer, the IRS may consider a periodic payment offer. You must submit an initial payment and continue to make monthly installments while your application is considered. As with the lump sum offer, your total liability must be paid within 24 months.
Submitting an offer application does not guarantee that the IRS will accept your offer. If your offer is returned or not accepted, your payment(s) will be applied to your tax debt. The $150 application fee is not applied to your outstanding tax debt.
You must maintain compliance with all tax laws even after your OIC is accepted. If you fail to remain in current compliance with the IRS within five years after your offer is accepted, your offer may be returned or rejected and you may acquire additional interest and penalties. In other words, if you don't file or pay your taxes on time, the IRS may revoke your OIC agreement.
Before submitting an Offer in Compromise, it is important that you explore and fully understand all of the payment options available for resolving your tax debt. Just as importantly, it is crucial that you speak with an experienced tax attorney who can assist you in determining your best option, answer all of your questions, clarify any doubts and uncomplicated intricate tax laws. Prolonging settling your tax will only result in added interest and penalties, thereby increasing your debt.
Contact McKellar & Easter, Attorneys At Law
Call 865-566-0126 or send us an email to make an appointment at one of three offices in Knoxville, Tennessee; Nashville, Tennessee; and Atlanta, Georgia. All initial telephone consultations are free and we accept credit cards for transactional work.