The IRS Offer in Compromise (OIC) program was established by Congress to assist taxpayers who have experienced significant financial problems in order to give them a fresh start. The OIC program provides taxpayers who owe the IRS more than they could ever repay an opportunity to pay a reduced amount in full satisfaction of the tax debt.
The OIC process is a complicated and time-consuming process. The OIC process usually takes 6 months, but can take a year or longer, depending on several factors. The IRS has the final word on an OIC although it has guidelines, rules, and protocols which it must follow. That’s why most OICs submitted by taxpayers without the assistance of a tax professional are rejected.
The government will accept an OIC with a reduced amount as full and final payment because it saves the government money instead of incurring expenses in pursuing collection of taxpayers over an extended period.
An OIC based on Doubt as to Collectibility (DATC) is based on a taxpayers inability to pay and takes into account the taxpayer’s financial situation, including income, assets, and other issues like medical expenses.
If a taxpayer does not agree that they owe the taxes claimed by the IRS or believes the IRS incorrectly calculated the tax, an OIC based on Doubt as to Liability (DATL) can be submitted requesting that their tax liability be reconsidered.
What is an Offer In Compromise (OIC)?
An Offer in Compromise is a process whereby the taxpayer offers the government a reduced sum of money in order to settle a delinquent tax bill. The Internal Revenue Code authorizes the IRS to accept less than full amount of tax liability owed in any civil or criminal case arising under the tax laws prior to the case’s referral to the Department of Justice.
It is a legitimate alternative to declaring a case as currently not collectible, or to a protracted installment agreement. The goal is to achieve collection of what is potentially collectible at the earliest possible time and at the least cost to the government. The IRS will accept an OIC when it is unlikely that the tax liability can be collected in full and the amount of the Offer in Compromise reasonably reflects collection potential.
Who is eligible for an OIC?
Most individual and business taxpayers who owe IRS income taxes, payroll taxes, penalties or interest may submit an OIC to the IRS to settle these liabilities. However, the IRS will not accept offers in compromise from every single taxpayer who submits an offer.
One of the following factors must be established in order for the IRS to settle the liability through the IRS:
- The taxpayer cannot pay off the IRS liability;
- There is doubt that the taxpayer actually owes the IRS liability;
- The settlement would promote effective IRS tax administration
If a taxpayer requests an OIC based on effective tax administration, the IRS will first be required to establish that there is no doubt to liability or collectability.
Who is not eligible for an OIC?
A taxpayer is not eligible for consideration of an Offer in Compromise based on doubt as to collectibility or effective tax administration if:
- Taxpayer has not filed all federal tax returns
- Taxpayer is involved in an open bankruptcy case.
Furthermore, if an ongoing business taxpayer files an Offer in Compromise for payroll taxes, that business must have filed and deposited all payroll taxes on time for two quarters preceding the offer. The taxpayer must further deposit all payroll taxes on time during the quarter in which the OIC was submitted.
What are the benefits of an OIC?
In our experience, the Offer in Compromise program of the IRS is one of the best tax resolution tools available to taxpayers. The program allows taxpayers to settle delinquent IRS taxes for less, or often much less than you owe (or what the government claims you owe).
A successful OIC can provide significant benefits to the taxpayer including:
- Presents an end to a long and intimidating financial problem;
- The IRS will stop all collections while the offer is being considered;
- Taxpayer is able to pay a reduced amount compared to what was owed;
- Tax liens will be released once the is completed;
- Allows the taxpayer to stay out of bankruptcy, and even reduce taxes that would not have been dischargeable in bankruptcy;
What are the benefits of an OIC?
We assist clients in every step of the IRS OIC process. An Offer in Compromise is a process whereby the taxpayer offers the government a reduced sum of money in order to settle a delinquent tax bill. The IRS OIC is not an amnesty program nor is it motivated by the IRS’ desire to cut delinquent taxpayers a break. Rather, it is a calculated business decision by the IRS to accept a smaller sum in an Offer in Compromise in lieu of spending the collection resources on chasing the taxpayer until the statute of limitation on collecting the tax runs out. Even with our help, an average Offer in Compromise process takes 6 to 18 months depending on many factors, including the district and the complexity of the case.
Here is a typical process and timeline for an Offer in Compromise:
We Analyze, Prepare, and Submit The Offer. We review your case and thoroughly review your financial information to determine whether you qualify, and on what terms. Upon completing our analysis, we prepare and submit the Offer in Compromise package to the IRS and advise you about all aspects of the process. If the OIC is one with monthly payments, you must make your first monthly payment with submission, and monthly thereafter. Even if your offer is rejected, you receive credit for the monthly payments which are subtracted from your tax liability.
The IRS Receives the Offer and determines whether your OIC meets all of the procedural requirements of the IRS Offer in Compromise and requires proof of the taxpayer’s financial condition to determine the adequacy of it.
The IRS Reviews the Financial Information in the Offer in Compromise and the attached documents to determine whether to accept your Offer in Compromise and for how much.
We Aggressively Negotiate With the IRS in order facilitate the most favorable acceptance of your offer. The success of your OIC greatly depends on the skill and experience of your tax attorney. We have extensive experience in all aspect of the IRS Offer in Compromise process.
If your Offer in Compromise is unreasonably refused, we can immediately appeal the case. Appeals of rejected IRS OIC are generally reviewed by an IRS OIC appeals officer in the taxpayer’s district.
If your IRS Offer in Compromise is accepted, you continue making the monthly payments on your reduced tax bill based on the agreed terms. An accepted offer requires the taxpayer to remain compliant with all future tax laws for 5 years from acceptance.
How does the IRS determine if an offer will be accepted?
Generally an acceptable Offer in Compromise amount depends on the equity of your assets, your family’s monthly income and how soon you are able to raise the money to pay off an acceptable Offer in Compromise. Once you submit an Offer in Compromise it may take the IRS roughly 6-18 months to investigate your Offer in Compromise. Therefore, the actual acceptance of your Offer in Compromise might not be issued for some time.
In determining the amount of an acceptable Offer in Compromise, the IRS first makes a determination of the value of the taxpayer’s assets on a discounted basis. Once a determination is made of the taxpayer’s net worth on a quick sale basis, the IRS then determines the taxpayer’s ability to make future payments.
In determining the amount of an acceptable Offer in Compromise, a cash value is assigned to that future ability to pay and that value is aggregated with the value of the taxpayer’s assets to determine a value of an acceptable Offer in Compromise. The aggregate number becomes the minimum amount which the taxpayer may pay in an Offer in Compromise to settle his tax liabilities.
The IRS will generally apply the following principles in evaluating Offers in Compromise:
In determining the amount that the IRS could collect from you, the IRS looks at the Reasonable Collection Potential to arrive at a minimum Offer in Compromise.
In determining the Reasonable Collection Potential, the IRS looks at the following two factors:
Value of Your Assets
In determining the amount of an acceptable Offer in Compromise, the Realizable Value of your assets equals the net equity you have in all of your assets. The starting point for consideration of any Offer in Compromise will be based on the value of the taxpayer’s assets, less any encumbrances or liens, which have priority over the Federal Tax Lien. In determining the amount of an acceptable Offer in Compromise, the liquidating or quick sale value of assets will be used.
Your Future Income
In determining an acceptable Offer in Compromise amount, the IRS also takes into consideration the amount that can be collected from the taxpayer’s future income. In evaluating those future income prospects, the taxpayer’s education, profession or trade, age and experience, health, and past and present income will be considered by the Offer in Compromise specialist. In evaluating future income potential, an evaluation will be made of the likelihood that any increase in real income will be available to pay the delinquent taxes.
The IRS generally determines the amount it could collect from your future income by subtracting necessary monthly living expenses from your monthly income over a set number of months. The IRS has guidelines it uses in determining reasonable living expenses, including transportation costs. Generally the IRS will multiply your disposable monthly income by either 48 or 60 months to determine your future income.
If accepted, what are my payment options?
The IRS does not require the taxpayer to Immediately Come Up With All the Funds Once the Offer in Compromise is Accepted! IRS Offer in Compromise policies provide several options for making payments on an accepted Offer in Compromise. Once you have received a notice of acceptance of your Offer in Compromise, you have the following options to make the payment:
You must pay the cash offer within 90 days of acceptance. A Cash Offer in Compromise is calculated by adding the realizable value of your assets, and the value of your disposable monthly income over 48 months.
Short Term Deferred Payment Offer
This payment option allows you to pay the Offer in Compromise in monthly payments for up to 2 years following the acceptance. A Short-Term Payment Offer in Compromise is figured by adding the realizable value of your assets, and the value of your disposable monthly income over 60 months.
Deferred Payments Offer
This payment option allows you to pay the offer amount in installments within the remaining statutory period for collecting the tax. The Offer in Compromise must include the realizable value of your assets plus the amount the IRS could collect through monthly payments during the remaining life of the collection statute. A Deferred Payment OIC has three payment options:
- Full payment of the realizable value of your assets within 90 days for the date the IRS accepts your offer; and Your future income in monthly payments during the remaining life of the collection statute.
- Cash payment for a portion of the realizable value of your assets within 90 days from the date the IRS accepts your Offer in Compromise; and Monthly payments during the remaining life of the collection statute for both the balances of the realizable value and your future income;
- The entire offer amount in monthly payments over the life of the collection statute just as with short-term deferred payment offers.
If there is no doubt that the tax is correct and no doubt that the amount owed could be collected in full, but exceptional circumstances exist such that collection of the full amount would create economic hardship or where compelling public policy or equity considerations provide sufficient basis for compromise.
The taxpayer bears the burden of proof to show their OIC qualifies for public policy or equity considerations.
They must show that their circumstances are sufficiently compelling to justify acceptance compared to other taxpayers in similar circumstances.
What do you have to do to be eligible for an Offer In Compromise?
To be eligible for an Offer In Compromise, all returns that are due must first be filed.
When does a Collection Information Statement need to be completed?
Collection Information Statement(s) are required for doubt as to collectibility and effective tax administration. It is also required for doubt as to liability involving Trust Fund Recovery Penalty assessments.
If I qualify for an installment agreement, can I still submit an Offer In Compromise?
If a tax liability can be paid in a lump sum or through an installment agreement, taxpayers will not be considered for an OIC. If an offer is received, it will be rejected with appeal rights. The only exception is if a taxpayer requests an Offer In Compromise under the effective tax administration provision.
The IRS recently levied my bank account. Will the levy proceeds be returned if I file an Offer In Compromise?
The IRS will keep all payments and credits made, received or applied to the total original tax liability before the Offer In Compromise was submitted. The IRS may also keep any proceeds from a levy that was served prior to the submission of an Offer In Compromise, but which were not received at the time the Offer In Compromise was submitted.
Are partial payments required with Submission of an Offer In Compromise?
Effective, July 17, 2006, the IRS has mandated a requirement that any lump-sum (90 day terms) offer must be accompanied by the payment of a non-refundable 20% deposit of the offer amount. For this purpose, a lump-sum offer in compromise is any offer of payment made in five or fewer installments. Any periodic payment offer in compromise (24 month short term deferred) must be accomplished by the payment of the amount of the first installment. The IRS will treat any failure to make an installment due under a periodic payment offer in compromise while the offer is being evaluated by IRS as a withdrawal offer.
Both the 20% deposit on lump-sum offers and payments on the periodic installment offers are in addition to the $150.00 user application fee.
Can taxes be settled by offering a fraction of what is owed?
The Offer In Compromise must include an amount equal to or greater than the total value of all assets, plus future income. That total is generally the reasonable collection potential amount, and not simply an offer of ten cents on the dollar, or a percentage of the debt. The OIC program is not designated to be a program for everyone with financial problems, and it should not be viewed as an invitation to avoid paying taxes.
Applying for IRS Offer In Compromise can be a daunting task, and professional help ensures your greatest chance at having your offer accepted. Steburg Law Firm’s team of professional tax attorney’s can plead your case before the IRS and help you reach the best solution possible. Allow our qualified professionals to help with the IRS and guide you through a process which can otherwise be an overwhelming ordeal. Contact us today to see how we can help resolve your case and learn how feasible financial freedom can be.