In 2011, the IRS launched a new program call the IRS Fresh Start Program. That was really a collection of changes to the tax code to make it easier for people to get relief from tax debt and penalties. Since then, the IRS has added occasional updates to allow for easier tax debt relief. Believe it or not, the IRS doesn’t want you to be buried in debt, they’d like to see you solve your financial problems and get a fresh start.
The Fresh Start tax code changes updated a number of IRS forgiveness programs including:
- Currently Not Collectible,
- Installment Agreements (IA),
- Penalty Abatement, and
- Offer in Compromise (OIC).
The biggest updates came to the OIC program. So now you know that OIC stands for Offer in Compromise – but what does that mean?
How an OIC Reduces Your Tax Debt
If you have a tax debt that you cannot pay off, the IRS created the Offer in Compromise as a way for you to say “I cannot pay the full amount that I owe the IRS, but here is the amount that I can pay. Will you accept that?”
This is a compromise that allows you to resolve your tax debt and allows the IRS to get paid. The IRS knows that debt is a stressful, heavy burden, so even though they are getting less money than you owe, it is better than nothing. Their hope is that by settling all your tax liabilities, you get a “fresh start” and can meet all your future tax obligations.
However, to take advantage of the OIC, you must fit certain qualifications. If you have filed for bankruptcy, then you cannot pursue an OIC because the tax debt will be settled through the bankruptcy proceedings. You must also have filed all your tax returns and be current on your estimated taxes. This shows the IRS that you are making an honest effort to straighten things out.
From there, you must show the IRS why they should accept a lower offer from you. They will accept an OIC for three reasons:
- Doubt as to Liability: If there is a genuine dispute about whether the tax liability exists, or how much the tax liability is.
- Doubt as to Collectability: If the taxpayer’s assets and income are less than the debt owed.
- Effect Tax Administration: In some cases, a taxpayer may have adequate assets to pay off the tax liability but doing so would cause an economic hardship.
If you meet the criteria, you can apply for an Offer in Compromise. That does not mean your offer will be accepted. There is an application fee of $205, but that can be waived if you are an individual (not a business) and meet the Low-Income Certification guidelines. You also do not pay an application fee if you are applying due to Doubt as to Liability.
If you are not sure whether you meet the criteria, there are some online calculators that can help you estimate whether your assets and income are lower than your tax liability.
How Do I Apply for an OIC?
If the IRS is going to accept a lower amount of money from you, they want to see some serious documentation showing that you are unable to pay the full amount.
For Doubt as to Liability, that means you need to fill out Form 656-L, Offer in Compromise.
For Doubt as to Collectability and Effective Tax Administration, you need to fill out Form 656, Offer in Compromise, along with Form 433-A (individuals) or Form 433-B (businesses), Collection Information Statement. This will involve collecting a lot of financial documentation including bank records, pay stubs, and proof of assets like real estate and vehicles.
How Much to Offer
Form 433 will help you come up with your offer amount, which will be the sum of the Net Realizable Equity (NRE) of your assets plus your excess monthly income.
NRE is calculated using Quick Sale Value, typically 80%, based on the Fair Market Value of your assets. NRE also uses the amount of all the cash in your bank accounts, minus $1000 for living expenses.
Excess monthly income is calculated by taking your gross pay and subtracting National Standard Expenses (not your actual living expenses).
You can argue that your expenses are higher than the National Standard Expenses, the IRS will be more lenient if you have special circumstances. This may include a member of your household who has a disability, drug or alcohol addiction, or something that may affect your ability to work for income. You can use Form 433 to explain your special circumstances to the IRS.
How to Pay
Finally, you must choose how you are going to pay. The first option is a Lump Sum Cash Offer, which means five payments or fewer, completed in five months or fewer. The other option is a Periodic Payment Offer, where there are at least six payments made within 24 months of the OIC acceptance from the IRS.
How Will I Know if the IRS has Accepted My Offer?
The IRS has two years to make a decision on whether to accept your OIC, but it almost never takes that long. For most individuals, it takes about six months. For more complex financials, such as self-employed individuals or businesses, it can be 12-18 months. You should know that about four to six weeks after you submit your application, the IRS will send you a notification that they’ve assigned an examiner to your case.
In some cases, the IRS might return your offer. This does not mean it is rejected. If you’ve neglected to submit the application fee, or did not include the right documentation, or are not current on your tax returns, your offer will be returned. You may resubmit your offer after you’ve fixed whatever was wrong.
If the IRS rejects your offer, they will send you a notice. If the amount you offered is too low, they will tell you what amount is acceptable. You are entitled to a report that explains why your offer was rejected, and you will have to ask the IRS for a copy. If your offer was rejected, you have the right to appeal their decision. Your appeal must be submitted within 30 days of the rejection notice.
An Offer in Compromise Expert Can Help You Reduce Your Tax Liability
The process of an offer in compromise is complex and tedious. If you are not a tax expert, one small mistake could cause your offer to get rejected. This is a situation where hiring a tax attorney like S.H. Block can be invaluable. Stanley Block has years of experience in dealing with the IRS, and he knows how to put together a successful OIC for you.
If you’d like to take advantage of a free consultation with S.H. Block Tax Services, fill out our online form or call us at (410) 793-1231. We will help you find relief from your tax debt so you can get a fresh start!
The content provided here is for informational purposes only and should not be construed as legal advice on any subject.