The Offer in Compromise (OIC) is one of the few programs available to taxpayers that can allow them to settle their federal tax debts for less than the full amount owed. Many taxpayers are probably familiar with hearing ads for settling IRS debt for “pennies on the dollar.” However, the OIC is not a magic solution that works for everyone. We highlight five things taxpayers should know about the IRS’s Offer in Compromise.
1. Eligibility
The IRS has a specific set of eligibility requirements that must be met before it will accept an OIC. Among other requirements, you must have filed all of your tax returns (and maintain tax compliance). That is, the IRS won’t be interested in settling your federal tax debt if you fail to file your tax returns for current/later tax years and/or continue to accrue additional, unpaid taxes, penalties, and interest. Additionally, you must not be in open bankruptcy proceedings.
2. Approval Process
The IRS closely scrutinizes OIC applications. It will only accept an OIC if it believes that it is in the IRS’s (i.e., the government’s) best interest—the most the agency can expect to collect from you over a reasonable period of time. To determine your "reasonable collection potential," the IRS will consider your income, expenses, and asset equity.
3. Preparation
Preparing an OIC can be a complicated process that requires extensive documentation. You will need to provide the IRS with financial records that support the information supplied on Form 433-A(OIC), including bank statements, pay stubs, and rental agreements. You must also complete a comprehensive application form, Form 656, which should be correctly filled out with accurate information. All tax forms and periods that you intend to compromise must be included on Form 656, or you will still be separately responsible to pay for such tax debts in full.
4. Payment
The OIC requires the payment of an “offer amount” to the IRS. The Offer amount is calculated by your income and allowable expenses, and any equity you have in assets. The amount accepted by the IRS will be inclusive of all previous penalties and interest on the tax debt. The Offer amount can be paid in several ways, including a lump sum (in 5 or fewer payments) or periodic payments (in 6 to 24 months). Additionally, unless you meet the Low-Income Certification guidelines, you submit an OIC application fee of $205 when you submit your OIC.
5. Legal Help
If you are considering making an OIC, you should consider finding an experienced tax attorney or CPA to help you prepare your application. The OIC process has several complex requirements, and a legal professional can help you navigate the application process, advise you on how to present your financial records, and help you determine the best offer to make. A legal professional can also help you avoid common mistakes that could lead to rejection or the acceptance of an offer that is higher than necessary.
Conclusion
If you have a substantial tax debt, the OIC program can be a lifesaver for some taxpayers. However, the eligibility requirements and application process can be challenging to navigate. Before making an offer to the IRS, taxpayers should be aware of the potential pitfalls and ensure that they submit an accurate and complete application. Above all, it is advisable to seek the assistance of an experienced tax attorney or CPA. They can help you navigate the unfamiliar OIC process and give you the best possible chance of success.
Contact Montgomery Legal today to discuss your case and legal options. Schedule a Consultation or call (214) 432-6100.
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