The IRS has a rather popular program for settling tax debt, the OIC program. Many people mistakenly believe that anyone can apply for this program and negotiate tax debts for pennies on the dollar. This can be a very good program for those who qualify and can pay the Offer amount. Many taxpayers are unable to pay the Offer amount.
The IRS does not negotiate with the taxpayer in the same manner that a car dealer would negotiate with a buyer. But there are many instances where the OIC allows the taxpayer to pay less than the tax liability. By following a process, you can submit an offer that increases your chances that the IRS will accept your offer.
The Offer-in-Compromise Program
This program does allow taxpayers to settle their tax debt for less than they owe under certain circumstances. The first step in obtaining an OIC is to be in tax compliance, which can be a big first step. This means you must file tax returns for the past 6 years. Additionally, you need to be making payments for the current year’s taxes.
Once you have achieved compliance, then you need to consider the three types of Offers-in-Compromise.
Doubt as to Collectability Offer: This is an Offer where the taxpayer agrees with the back taxes owed but cannot afford to make payment in full before the collection statute expires. The taxpayer will make an offer based on their financial situation and supporting documentation.
Doubt as to Liability Offer: The taxpayer is requesting to compromise the debt because they do not feel they owe the tax. The taxpayer needs to provide the documentation to support their claim in the same manner as an audit or audit-reconsideration.
Effective Tax Administration Offer: This refers to an Offer where the taxpayer has ability to pay, but because of public policy, the IRS should not require full payment. The IRS should accept the Offer for less than full payment.
The majority of Offers requested are Doubt as to Collectability offers. Let’s look at the process of getting the necessary documents completed when submitting an Offer.
To submit an Offer-in-Compromise, you need to provide complete financial information, including proof of income, expenses, and assets. The forms used for the Offer submission are:
- Form 433-A(OIC), Collection Information Statement for individual or Form 433-B(OIC) for business.
- Form 656, Offer in Compromise
By filling out the 433-A(OIC) or 433-B(OIC), you will be able to see your Reasonable Collection Potential (RCP). Two components calculate the RCP.
- Net Equity in Assets – IRS takes 80% of value less loan payments, this is the Quick Sale Value (QSV).
- Twelve months of Future income if making Lump Sum Offer, or 24 months if making Periodic Payment Offer
The IRS uses Local and National Standards for determining allowable expenses and they are:
- Housing and Utilities based on County of residence and household size.
- National Standard for Food, Clothing, and Other items based on size of the household.
- Car Ownership Costs – one car $629 or two cars $1,258
- Car Operating Costs – one or two cars, cost is dependent on region/city and one or two cars.
- Out of Pocket Health Care – Under 65 – $79 or 65 and Older $154
- Public Transportation Expenses – $218
These are guideline standards and there is some room to negotiate for a higher allowable if deemed necessary. For example, a medical professional advises that health issues require a special diet. Housing and Utilities is one standard that is firm and unfortunately, many taxpayers have mortgage and rent that exceeds the allowable.
These expenses need to be necessary in the eyes of the IRS and not in the eyes of the taxpayer. For instance, parents may consider paying their child’s college tuition a necessity and feel they have an economic hardship. The IRS will look at this as if they are paying for the child’s education.
Taxpayers may feel that the money that they contribute to their 401k retirement plan is off limits to the IRS. But the reality is that the IRS is not going to let anyone build a retirement fund when they owe taxes.
However, there could be costs for important reasons that the taxpayer isn’t considering. Something like life insurance for a taxpayer with a family or disability insurance for protection against a severe accident. These are things that younger people might not be thinking about, but they are important. You should rightly include these as part of your basic living expenses.
After completing the financials, you can determine if you qualify for an Offer-in Compromise. The 433-A(OIC) shows your monthly money left after expenses. It will calculate for 12 or 24 months, plus the value of your assets. This is your Reasonable Collection Potential which will be the minimum Offer amount.
You can multiply the monthly disposable income by the remaining collection statute to determine if you can full pay the debt. If you can, you don’t qualify for an Offer. Use the financials to set up a payment plan instead.
Getting the Offer-in Compromise Ready for Submission
Once you confirm you qualify for an Offer, make sure you completely and accurately filled out the offer in compromise form. This would include indicating the payment terms, Lump Sum Cash or Periodic Payment, type of tax and tax years. Below is a description of the payment terms.
Review your 433-A(OIC) to 433-B(OIC) to be sure that the information is complete and accurate. Have all the supporting documents organized and show a clear picture when provided with the financials. The goal is that the IRS has all the information necessary to make an evaluation of the Offer.
With our expertise, we review your financial information and documents to improve the chances of the IRS accepting your Offer. There is a lot to consider in understanding how to get an Offer-in-Compromise approved, and we investigate all options.
Lump-Sum Offers: This is where the taxpayer agrees to make the Offer payment within 5 months of the acceptance date. You do not need to make the payment monthly or in equal payments.
Include the total offer amount, 20% initial payment, and remaining balance. Additionally, show the payment schedule for the balance up to 5 months.
You will need to write and mail two checks with the Offer. One for the application fee of $205 and the second for the 20% initial payment. If you qualify for low-income, then you do not include any payments with your Offer. There is a table on Form 656 showing if you qualify for low-income.
On acceptance of the Offer, the first payment of balance will be due within 30 days of acceptance.
Periodic Payment Offers: This payment term is for those who opt to make the Offer payment in 6 to 24 months. The RCP is net equity in assets (QSV) plus 24 months of future income which will be the minimum offer amount.
You cannot exceed a total of 24 months, and you do not have to make payments in 24 equal installments. You must show the first monthly payment amount, and the payments thereafter and indicate the day of the month and amount. Please indicate the day of the last payment and the amount. Depending on your finances, you could make small payments and then make a large final payment.
Unlike the Lump-Sum Offer term, you need to make payments for the Periodic Payment while the Offer is in review. It is important to make payments while the OIC is under review, to avoid having it rejected and losing appeal rights.
Low-income taxpayers do not need to make any payments while IRS considers the Offer. This includes the application fee.
All other applicants will need to send two checks with the Offer submission. One for the application fee of $205 and the other for the first month payment of your specified amount.
Questions taxpayers may have:
How long does Offer-in-Compromise take?
The timeline for an OIC from request to final decision can vary greatly. All offers are unique and could take 4-15 months or longer in some cases. This is something taxpayers need to consider when reflecting on their current situation and a goal they have.
Does an Offer-in-Compromise really work?
Yes, an Offer will work for taxpayers who qualify and are able to make payment on the Offer amount. It is important to understand that the IRS does not negotiate for less. The taxpayer must show through financial disclosure whether they have the bandwidth to pay or not.
Does FTB have an Offer-in-Compromise?
Yes, CA state does have an OIC program. The state is much more stringent and less likely to accept an Offer than the IRS. The collection statute lasts for a minimum of 20 years. The tax authorities prefer to keep the taxpayer in collections rather than accepting a smaller payment.
For questions about the Offer-in-Compromise program, contact Dan Ohara at (408) 684-8505 or email dan@oharataxresolution.com.