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When it comes to an insurmountable tax debt, many taxpayers wish that the IRS could grant them a reprieve and absolve their balance, or at least a portion of it. The response from the IRS? We already do that.
The IRS Offer in Compromise program has been given various taglines, such as pennies-on-the-dollar, or one-time settlement offers. These fake monikers are a product of third-party preparers and tax resolution firms who are eager to take advantage of the business of owing the IRS big bucks.
By IRS definition, an Offer in Compromise (OIC) is an agreement between a taxpayer and the Internal Revenue Service that settles the taxpayer’s tax liabilities for less than the full amount owed.
According to the 2010 IRS data book, 57 thousand offers were received, but only 14 thousand were accepted, less than one-quarter of all offers received.
So who qualifies to file an offer? How does one go about requesting this program? Here are 10 things you didn’t know about the OIC program.
There are three provisions under which an offer can be submitted.
Doubt as to Liability: This means that you have a legitimate reservation about the accuracy of your tax balance, and you can demonstrate that the amount is incorrect as it stands.
Doubt as to Collectability: Most offers are filed under this provision. Doubt as to Collectability means there is a reasonable uncertainty that you will be able full-pay the debt over time. Under these terms, a taxpayer must submit a detailed financial statement proving to the IRS that there is good reason to consider a smaller amount in lieu of the entire debt.
Effective Tax Administration: Offers filed under this category assume full responsibility for the debt, and also show potential for broad collection, but an exceptional circumstance exists that calls for the IRS to exercise amnesty.
The IRS will not consider an OIC unless you are current in filing.
If the IRS is going to consider compromising on a tax debt and allow you to pay less than you currently owe, then you first agree to bring yourself into compliance with your tax filing obligations. This includes all tax returns, estimated tax payments for self-employed taxpayers, and or federal tax deposits for businesses.
Filing an OIC does not necessarily halt IRS collection action.
If you have an outstanding debt to the IRS, and if that tax balance has been turned over to the IRS collection division, then the act of filing an OIC will not cease enforcement action. Prior to agreeing to hold any collection, the IRS needs to analyze your current financial condition to ensure you are a good candidate.
If you show ability to pay in full via liquid assets, to borrow to pay off or significantly pay down your balance, or if you have equity available in property, then the IRS will request you resolve your debt using these means.
Once a processable offer is received, the IRS will halt any tax levies while your offer is considered.
The IRS charges an Application Fee, and up-front payment must be made.
In general, a taxpayer must submit a $150 application fee in order for the IRS to consider the offer. If your offer is unprocessable (for example, if required forms are missing), then the IRS will return the fee.
Initial payments must be made while the IRS reviews the offer. These payments are non-refundable; if the IRS rejects your offer, your payments will remain as applied to your tax balance. If you are paying with a lump-sum, you must submit a non-refundable amount that represents 20 percent of your offer.
There are three ways to make payment on an OIC.
Taxpayers can opt to pay in a lump-sum (five or fewer installments), with short-term periodic payments (monthly payments of two years or less), or with deferred payments (payments made over the remaining time on the collection statute – generally 10 years from when the IRS assessed the balance).
If your OIC is accepted, you agree to be good.
If the IRS accepts your offer, you agree to file all tax returns on time, as well as make timely payment on any tax due for five years. Failure to adhere to these terms will result in default of the offer. If your OIC defaults, the IRS has the right to reassess your full balance.
Federal Tax Liens are not released if an OIC is filed.
If a Notice of Federal Tax lien is filed prior to the filing and acceptance of an OIC, the IRS will not release the lien until the compromised balance has been paid in full. Nor will they reissue the Notice of Lien for the reduced amount while you make your offer payments.
The IRS will not tell you how much to offer.
Don’t ask, because the IRS cannot answer this. The forms required for an OIC contain a worksheet to assist you in determining how much your offer should be. Offers that have no realistic acceptance potential (for example, an “offer” for $100 only) will be disregarded.
The IRS will still keep your refunds.
The IRS will keep any refund due to you from your tax return for tax periods extending through the calendar year the IRS accepts the OIC. If you are current in your offer payments, then you will be eligible for subsequent refunds.
You can file the offer yourself.
Tax resolution firms will charge hundreds, if not thousands, to prepare an offer and submit it to the IRS. Make no mistake; the offer program is designed for taxpayers to do themselves.
For more information or to get started with your offer, visit the IRS Offer in Compromise page at IRS.gov.
More from this contributor:
What is an IRS Notice of Federal Tax Lien?
Representation before the IRS – What you need to know
How to think and act like a tax lawyer