For many people, they are overwhelmed by IRS tax debt. It may seem like there is no way out. However, there is a program that may help in your situation.
Can you settle your IRS debt?
An Offer in Compromise (OIC) allows people in tough financial situations to settle their tax debt for less than what they owe. While it sounds like a great solution, the IRS has tight restrictions. Here is what you need to know about Offers in Compromise and who may qualify for it.
What Is an Offer in Compromise?
An Offer in Compromise is an agreement between you and the IRS. You agree to settle your tax debt for less than the full amount. But it does not come automatically.
As part of the application, the IRS reviews your financial situation to see what you can realistically pay now and in the near future. The IRS will accept an OIC only if they believe the offer represents the most they can expect to collect within a reasonable timeframe. There are other requirements you must meet, such as filing all your tax returns and being current on your estimated tax payments or payroll taxes.
Who Qualifies for an Offer in Compromise?
Unfortunately, not everyone qualifies for an OIC. The IRS will look closely at your finances using reasonable collection potential (RCP). This calculates your assets plus what you can afford to pay over time after basic living expenses. You might qualify if:
- You cannot pay the full tax debt.
- You are up to date with all your tax filings.
- You are not currently involved in bankruptcy proceedings.
- You have not tried to avoid taxes through fraud or other improper means.
How Do You Apply?
If you want to apply for an Offer in Compromise, you need to fill out Form 656. Along with that, you need to attach a detailed financial statement on Form 433-A (OIC) if you’re an individual or Form 433-B (OIC) if it’s a business. These forms ask for a thorough snapshot of your finances, including your income, expenses, debts, and assets.
You also have to pay a non-refundable $205 application fee unless you qualify for a low-income exception. Plus, you will be asked to pay an initial payment toward the offer amount. If you are submitting a lump-sum offer, this is about 20% of your total offer. However, this amount would be the first monthly installment if you pay over time.
While the IRS reviews your offer, most collection actions are placed on hold.
How Do You Decide What to Offer?
This can be the tricky part. The IRS expects at least the value of your assets plus what you could pay from future income over 12 to 24 months. If you offer too little, the IRS will reject your offer.
For this reason, you may want to work with a tax resolution lawyer who knows how to calculate reasonable collection potential. Plus, when they help craft an offer, you may have a better chance of acceptance.
What Happens If Your Offer Is Accepted?
If the IRS accepts your offer, you have made a fresh start. However, there are strings attached:
- You must make every payment on time.
- You have to file all required tax returns for the next five years.
- You cannot take on any new tax debt during that time.
Failing to meet these terms can result in the IRS canceling the agreement. Unfortunately, that gives them the right to go after the full amount owed.
What If Your Offer Is Rejected?
If your offer is denied, you do not want to lose hope. You can appeal the decision within 30 days using Form 13711. Sometimes, the IRS will reconsider your financial details or allow you to submit a revised offer. If that does not work, payment plans or requesting a “currently not collectible” status may be options for you.
You Can Settle Your IRS Debt
Now that you know a little bit more about Offers in Compromise and who qualifies, you can take the next steps for your financial situation. If you are feeling stuck under a mountain of tax debt, an OIC might be the key to relief. With the right information and help, you can resolve your debt.
At Easter & DeVore, Attorneys at Law, we are here to help. Schedule a consultation to set what you need to do to start the process.
