If you qualify, an Offer in Compromise is frequently the ideal solution to resolving your delinquent tax liability.
In the last published IRS statistics, the IRS reports that the average discount on an accepted Offer In Compromise (“OIC”) was 88%–only 12 cents on the dollar was paid by taxpayers with accepted OIC’s–and that the average acceptance rate was 47.6%. Given the tremendous savings possibilities, OIC’s are an excellent way to settle an existing or contested tax liability.
Created in 1992 by Section 7122 of the Tax Code, OIC’s are still relatively new IRS instruments. In her experience, Ms. Hamil has found that this is one of the most misunderstood areas of tax practice. Many of her clients have sought her services after they have filed numerous OIC’s with other tax consultants. After Ms. Hamil reviewed the OIC’s filed by the previous tax consultants, it was evident that these offers had no chance of success. The formula the IRS uses to decide whether to accept an OIC is public record, and though you can never know in advance whether an offer will be accepted, it is almost doomed to fail unless the offer comes close to the IRS formula. Each time an offer is rejected, you must start the process all over, and remember, interest continues to accrue while each OIC is being considered.
Don’t waste your time and money with frivolous offers. Let us evaluate your situation and help you make an offer that is more likely to be accepted.
What is an Offer In Compromise?
An Offer In Compromise is an agreement between the taxpayer and the government that settles a tax liability for payment of less than the full amount owed. The IRS will generally accept an Offer In Compromise when it is unlikely that the tax liability can be collected in full and the amount offered reasonably reflects collection potential. The goal is to achieve collection of what is potentially collectible at the earliest possible time and at the least cost to the government. Once the Offer In Compromise is accepted, the taxpayer must remain in compliance with all filing and payment obligations, including staying current with quarterly estimated tax payments and not incurring any new tax debt, for five years or until the offer amount is paid, whichever is longer. Failure to abide by these terms may result in the default of the Offer In Compromise and reinstatement of the original tax liability.
Are You Eligible to make an Offer In Compromise at this time?
1. Do you currently have an open bankruptcy proceeding? If you are involved in an open bankruptcy proceeding, you are not eligible to have your offer considered at this time.
2. Have you filed all of your tax returns that you were legally required to file prior to this date? If you have not filed all required tax returns, you will be required to do so before the IRS will evaluate your offer.
3. Are your estimated tax payments up to date for the current tax year? The IRS will not process your Offer In Compromise if they determine that your estimated tax payments for the current year’s income tax liability are not paid up to date.
4. Do you have the application fee? Your offer must include the $150 application fee unless you are requesting an exception based on your income level.
5. Do you have the funds to meet the terms of your offer? Your offer must include a 20% payment for Lump Sum Cash Payment Offers or the entire first installment of your Periodic Payment Offer (Short Term or Deferred) unless you are requesting an exception based on your income level.
NOTE: If you currently have an approved installment agreement with the IRS and are currently making installment payments to the IRS, then you may stop making those installment agreement payments when you submit a Periodic Payment Offer. This will allow you to make the payments required under the Periodic Payment guidelines. You do not have to make both installment agreement payments and periodic payments at the same time.
This procedure does not apply to Lump Sum Cash Offers. If you submit a Lump Sum Cash Offer and you are currently making installment agreement payments, then you must continue to make your installment agreement payments until your offer is accepted.
The Basis of an Offer In Compromise:
An Offer In Compromise can be based on any of the following reasons:
- Doubt as to Collectability: This means that doubt exists that the taxpayer could ever pay the full amount of tax liability owed within the remainder of the statutory period for collections.
- Doubt as to Liability: This means that a legitimate doubt exists that the taxpayer owes all or part of the assessed tax liability.
- Effective tax Administration: This means that the taxpayer does not have any doubt that the tax is correct and there is potential to collect the full amount of tax owed, but an exceptional circumstance exists that would allow the Service to consider an offer. To be eligible, a taxpayer must demonstrate that collection of the tax would create an economic hardship or would be unfair and inequitable.
Offers In Compromise: Types & Payment Options
Taxpayers may choose to pay their Offer In Compromise in one of three payment options:
1. Lump Sum Cash Offer – Payable in non-refundable installments, the offer amount must be paid in five or fewer installments upon written notice of acceptance. A non-refundable payment of 20 percent of the offer amount along with the $186 application fee is due upon filing the Form 656.
2. Short Term Periodic Payment Offer – Payable in non-refundable installments; the offer amount must be paid within 24 months of the date the IRS received the offer. The first payment and the $186 application fee are due upon filing the Form 656. Regular payments must be made during the offer investigation.
3. Deferred Periodic Payment Offer – Payable in non-refundable installments; the offer amount must be paid over the remaining statutory period for collecting the tax. The first payment and the $186 application fee are due upon filing the Form 656. Regular payments must be made during the investigation.
The IRS is not bound by either the offer amount or the terms proposed by the taxpayer. The OIC investigator may negotiate a different offer amount and terms, when appropriate. The investigator may determine that the proposed offer amount is too low or the payment terms are too protracted to recommend acceptance. In this situation, the OIC investigator may advise the taxpayer as to what larger amount or different terms would likely be recommended for acceptance.