If your tax debt is totally overwhelming and you have no hope of being able to pay it, even with an installment plan over several years, then you may be a candidate for the IRS’s Offer in Compromise (OIC). An OIC allows you to settle your tax debt for less than the full amount.
If this sounds appealing, don’t get too excited before you know all the details. An OIC requires application, and is not automatic. The IRS has a number of requirements that you must meet before being considered, and then reviews your ability to pay, equity in assets, income, and expenses before deciding whether to grant you an OIC.
Rate of Acceptance
In 2019, the IRS received 54,225 applications for OICs and only accepted 17,890 of them, or roughly 33%. That’s 7% fewer applications than the agency accepted in 2017 and 2018, both years in which the number of applications was significantly higher.
Negotiating debt with the IRS is not an easy proposition. The agency only approves an OIC when it believes the amount offered represents the absolute most it can collect from you within a reasonable time period. If the IRS expects you can pay your tax debt in full through either an installment agreement or equity in assets, it generally will not accept an OIC.
In order to be eligible for an OIC, you must have filed all required tax returns and made any required estimated tax payments. If self-employed, you must also have submitted all federal tax deposits. You are not eligible to apply for an OIC if you are in an open bankruptcy or audit, or have any outstanding innocent spouse claim issues.
To help determine if you are eligible, you can complete the IRS’s Offer in Compromise Pre-Qualifier. In addition to ensuring you meet basic requirements, this form considers your financial situation, including assets, and will either determine you can pay your tax liability in full or calculate a preliminary offer amount. The tool is only a guide, and you can still apply for an OIC even if the form determines you can pay your full liability.
To apply for an OIC, you must complete both Forms 433 and 656. Form 433, Collection Information Statement for Wage Earners and Self-Employed Individuals, covers your current financial situation (asset equity, income, and expenses) as well as your future earnings potential. It includes a separate section where you may explain any special circumstances related to your financial situation. Based on your input, the form will help you calculate an appropriate offer amount.
Along with the form, you’ll need to submit copies of:
- recent bank, investment, and retirement account statements;
- your W-2, pay stubs, and other proof of income;
- self-employment tax schedules;
- statements from lenders showing payments, payoff amounts, and balances;
- verification of delinquent state and local taxes;
- a host of other documents that support your expenses or your financial position.
Once you’ve completed Form 433, you can move onto Form 656, Offer in Compromise, to make your actual application. If you have a legitimate doubt that you owe all or part of your tax debt, you may request a Form 656-L, Offer in Compromise Doubt as to Liability, from the IRS and submit that instead.
You are also required to pick a payment method and include the initial payment with your offer. The two payment options are:
- Lump Sum Cash Payment – this requires that you include 20% of your total offer along with your application, and then pay the balance in five or fewer payments within five or fewer months of your application being accepted.
- Periodic Payment – with this option, you include a first payment and are expected to pay off the remaining balance in monthly payments within the next six to 24 months per your offer terms.
When you submit your OIC package, you must also include a $205 application fee. While the IRS makes no firm promises, it generally takes about six months to process all your data and either accept or reject your OIC. If the IRS has not made a determination within two years of receipt of your application, your OIC is considered automatically accepted.
Other Benefits and Expectations
Once you’ve submitted your OIC application, your first payment and fees will be applied to your outstanding tax liability. The IRS may also file a lien on your property. The agency will, however, suspend other collection activities and not require you to make any payments on existing installment agreements.
Have Questions? Call the Experienced Tax Attorneys at Wiggam & Geer
If you have a tax liability that you don’t think you can pay, you may be eligible for an Offer in Compromise. The experienced attorneys at Wiggam & Geer can evaluate your situation, recommend a course of action, and assist you in the process. Contact Metro Atlanta’s top tax attorney’s by clicking here or giving us a call at (404) 609-1300.