The Offer in Compromise Program
Debt comes in many forms and can have an adverse effect on our business or personal finances. Debt can be both a tool and a burden. Tax debt – the amount you owe the Federal or state government for underpayment of tax obligations – can be a more than a burden, and in egregious cases, can present criminal risk. In order to reduce the debt outstanding, the IRS developed the Offer In Compromise. The Offer in Compromise or (OIC) program, in the United States, is an Internal Revenue Service program under 26 U.S.C. § 7122 which allows qualified taxpayers with an unpaid tax debt to pay an amount that is less than the total tax debt.
Taxpayers who would like to be considered for an Offer In Compromise should be very leery of television and radio ads, suggesting that you can settle your tax debt for pennies on the dollar. Likewise, if you contact a tax resolution company, you will more than likely be speaking to a salesman, who will tell you that you qualify for an OIC without having reviewed relevant documentation Contrary to popular belief, the Offer In Compromise Program is not a negotiation between the Taxpayer and the IRS, but rather a resolution process based upon objective criteria.
Eligibility for an OIC is based upon “collectability,” which involves a number of factors: First, the excess of your gross monthly income over allowable expenses (available income). It should be noted that some expenses may be limited to the national standards, which are predicated upon household size and geographic location; Second, gross assets less outstanding secured debt to arrive at net assets; and Third, a determination of the time period remaining under the Statute of Limitations for collections. The total monthly available income plus the total of net assets, represents the minimum amount of the offer. But the analysis does not end there. The minimum offer amount must be measured against the remaining period under the statute of limitations.
Generally, the IRS will not accept an OIC if you can pay your tax debt in full through an installment agreement or a lump sum over the remaining period under the collection statute. This third factor is often overlooked by tax practitioner and tax resolution companies. This is why you need a Tax Attorney.
Are you Eligible?
Before the IRS will consider an OIC, you must do the following:
- File all tax returns you are legally required to file; (See a tax law professional for any questions)
- Make all required estimated tax payments for the current year; and
- Make all required federal tax deposits for the current year if you are a business owner with employees. Individuals applying may disregard this step.
If you are eligible the IRS will require you complete and submit Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed; Form 433-B (OIC), Collection Information Statement for Businesses; Form 656, Offer in Compromise.
Paying for your OIC
The IRS has several payment options for individuals and businesses alike. After filing the $186 OIC application fee and before the IRS can consider your Offer in Compromise, you must choose a payment option.
You may either choose to pay in lump sum cash, which requires 20% of the total offer amount be paid with the offer and the remaining balance paid in 5 or fewer payments within 5 months of the date of your offer acceptance;
You may choose a periodic payment, which requires you to send your first payment with your offer and pay the remaining balance within 6 to 24 months. Under this option you must continue to make monthly payments to the IRS while they evaluate your offer. If you do not continue to make payments, your offer will be rejected and no appeal is allowed.
Funding Your Offer
If you don’t have the money necessary to fund your offer, you may consider taking out a loan from friends, family or the bank. The IRS warns that, while you may borrow against other assets (such as a 401k or IRA), this may trigger additional and future tax liabilities.
Dealing with the IRS can be a complicated and time-intensive process. If you believe you are eligible for an Offer in Compromise, please see your legal and tax professional for a consultation.