IRS Offer in Compromise
If you are unable to pay your total tax liability, you may be able to settle your tax debt for less than the total amount that you owe to the IRS. Consequenlty, the IRS allows taxpayers to submit an offer in compromise to settle their tax debts. You may qualify for an offer in compromise based on an analysis of your income and the equity in your assets. The Internal Revenue Service uses your income and assets to calculate the reasonable collection potential (RCP). Your reasonable collection potential deals with what the IRS can expect to collect. An offer in compromise will stop all IRS collection actions such as an IRS levy or wage garnishment.
Do you have a financial hardship?
Before the IRS can consider your offer in compromise, you must (1) file all tax returns you are legally required to file, (2) have received a bill for at least one tax debt included on your offer, (3) make all required estimated tax payments for the current year, and (4) if you are a business owner with employees, make all required federal tax deposits for the current quarter and the two preceding quarters.
An offer in compromise may be a legitimate option if you can’t pay your full tax liability or doing so creates a financial hardship. The IRS will consider your unique set of facts and circumstances:
- Ability to pay
- Asset equity
IRS Offer In Compromise Options
The IRS considers three grounds as a basis for your IRS offer in compromise:
- Doubt as to liability: The IRS can accept an offer in compromise if there is doubt as to liability. A compromise qualifies only when there is a genuine dispute as to the existence or amount of the correct tax debt. Under this method of compromise, you are able to contest the underlying merits of the tax liability. In other words, you contest whether you truly are liable for the tax.
- Doubt as to collectability: Your offer in compromise may be accepted if there is doubt that the amount owed is fully collectible. Doubt as to collectibility exists in any case where the taxpayer’s assets and income are less than the full amount of the tax liability.
- Effective tax administration: Your offer in compromise may be accepted based on effective tax administration. An offer may be accepted based on effective tax administration. This is appropriate when there is no doubt that the tax is legally owed and that the full amount owed can be collected. But requiring payment in full would either create an economic hardship or would be unfair and inequitable because of exceptional circumstances.
There are two methods of payment for your offer in compromise
Your initial payment varies based on your offer and the payment option you choose.
- Lump Sum Cash: Under this method, you will submit an initial payment of 20 percent of the total offer amount with your application. After the IRS accepts your offer in compromise , you will pay the remaining balance of the offer in five or fewer payments.
- Periodic Payment: Under this method you will submit an initial payment with your application. You will then continue to make payments toward the remaining balance in monthly installments while the IRS considers your offer. If the IRS accepts your offer, you must continue to pay monthly payments until you pay it in full. If the IRS rejects your offer, the IRS will your payments will not refunded it.
Also, be aware that your minimum offer is based on your net disposable income and equity in assets, including any dissipated asset.
What forms do I need to use to submit an IRS offer in compromise?
The IRS includes step-by-step instructions and all the forms for submitting an offer in the Offer in Compromise Booklet, Form 656-B (PDF). Your completed offer package will include:
- Form 433-A (OIC) (individuals) or 433-B (OIC) (businesses) and all required documentation as specified on the forms;
- Form 656(s) – you must submit individual and business tax debt (Corporation/ LLC/ Partnership) info on a separate Form 656;
- $186 application fee (non-refundable); and
- Initial payment (non-refundable) for each Form 656.
If the IRS rejects a taxpayer’s offer in compromise, the IRS will notify the taxpayer by mail. Moreover, the letter will explain the reason that the IRS rejected the offer. The letter will also provide detailed instructions on how the taxpayer can appeal the decision to the IRS Independent Office of Appeals. However, the taxpayer must file the appeal within 30 days from the date of the letter.
Find Out if You Qualify for Tax Relief – Contact a Tax Attorney
If you have an IRS tax debt and need fast and effective tax relief, contact a tax attorney Disparte Tax Law for a free consultation today. A tax attorney can review your options. An IRS Installment Agreement or Offer in Compromise may be suitable for you.