An offer in compromise lets you sort out your tax debt for a lesser amount than you owe. It may be a viable option if you cannot pay your entire tax liability or if doing so would cause financial hardship.
What is the offer in comprise?
An Offer in Compromise (OIC) is an arrangement between the taxpayer and the IRS that details and settles the taxpayer’s tax liabilities for less than the current balance owed. If the taxpayer’s liabilities can be paid in full through an instalment agreement or other similar means, the taxpayer would not normally be eligible for an OIC.
To be qualified for the OIC program, the taxpayer should have completed all tax returns and made the needed, estimated tax payments for that year; if they own a business with employees, they must have made all required federal tax deposits for the current quarter.
Is an Offer in Compromise appropriate for the client?
The IRS established the Offer in Compromise programme because many taxpayers can only pay their tax liabilities if incurring financial hardship. The IRS accepted 24,000 offers totalling $261.3 million in 2018. They also turned down 35,000 offers. So, how is an Offer in Compromise the best option for your client?
To be successful with an offer in compromise, you must show that your client cannot pay the full tax debt owed, that the tax is not owed, or that an offer is in the best interests of all parties.
The IRS generally accepts offers when the amount offered represents the most the IRS can expect to collect in a reasonable amount of time.
The first thing to consider when determining whether or not your client is an ideal fit for OIC is eligibility requirements. To be eligible for a compromise offer, your client must:
- Complete all tax returns.
- Have a bill for at least one tax debt that is included in their offer
- Make all required current-year estimated tax payments.
- Make all necessary federal tax deposits for the current fiscal quarter (if they are a business owner with employees)
In addition to eligibility, the IRS will consider the following factors when determining your client’s financial hardship:
- The ability to pay
- Equity in assets
Remember that while certain qualifications and requirements are set in stone, the Revenue Officer reviewing your client’s case will consider the big picture. Your client’s lifestyle will influence the officer’s recommendation for an OIC.
For example, if you claim that your client cannot pay their entire tax bill, but they drive a Range Rover and own a $2 million home, the officer will not consider them a good candidate. Finally, the IRS does not fund lifestyles but collects taxes.
Most of a client’s lifestyle information is reflected on Form 433-A, but the remainder is gathered through investigation. If you can demonstrate that your client is living a high-end lifestyle due to exceptional circumstances, the officer will consider that (this would fall under effective tax administration).
Simply because your client has equity in their home or vehicle does not mean the IRS expects them to sell them to pay their debt. Overall, if your client lives a high-end lifestyle and prefers to make lifestyle changes gradually (rather than abruptly with an Offer in Compromise), you should look into instalment agreements and pay special attention to the Six-Year Rule in conjunction with the One-Year Rule.
This is not to say that your client will automatically qualify for OIC if they can afford to pay their tax debt but are willing to sacrifice their lifestyle. To qualify, they must still meet all of the requirements.
Who Will Not Be Eligible for an Offer in Compromise?
Many of your clients will want to try for a compromise offer because it can significantly reduce the tax debt they owe. However, even if they have a large debt, only some are eligible.
The IRS will not accept a settlement offer from a taxpayer who:
- Who any outstanding tax returns
- Who has a history of failing to pay their taxes
- Who has purposefully avoided paying taxes
- Who is a tax sceptic
- Who is involved in an ongoing bankruptcy proceeding (or has a business in an open bankruptcy proceeding)
- Who has had their tax obligations referred to the Department of Justice
Options for Payment
Your initial payment will vary depending on the option you select from your offer.
- Lump-sum Cash
Include a payment of 20% of the total offer amount with your application. If your offer has been accepted, you will be informed in writing. Any outstanding balance on the offer is paid in five or fewer instalments.
- Payment in instalments
Include your initial payment with your application. While the IRS considers your offer, continue to pay the remaining balance monthly. If accepted, make monthly payments until the loan is paid in full.
You do not need to send the application fee or the initial payment if you meet the Low-Income Certification guidelines. You do not need to send the application fee or the initial payment if you meet the Low-Income Certification guidelines. You will also not be required to make monthly payments while your offer is evaluated.
The Bottom Line
If you are struggling with IRS debt, an Offer in Compromise may be your best option. If you can justify your situation, you can reduce your tax bill significantly. Remember that the IRS will require you to exhaust all possible repayment options first.
IRS Problems has a team of experts ready to assist you. Call them right away so they can start managing your debt and finding the best solution for you!