Things you didn't know about Offer in Compromise
- February 8, 2020
- Posted by: asal
- Category: Tax Resolution
The IRS has an Offer in Compromise program that lets the taxpayers settle their debts for less money from what they actually owe. Now, even though this is a common and reasonable solution for people’s tax problems, not many people qualify for this program. The reason behind this is simple. According to the IRS, most taxpayers have the ability to pay their taxes with their current income and assets. And if not, they can pay it with a payment plan. This is why they don’t accept many Offer in Compromise requests. Most of them end up paying their taxes in a single lump-sum payment or through monthly payment plans.
The OIC program is for a small pool of taxpayers. These are the ones who won’t be able to pay their debt with their income and assets before the statute of limitations on the debt is over. To know if you are a part of that pool, here are a few things that you didn’t know about the Offer in Compromise and can help you in figuring out if it is the right option for you:
1. There are more than 1 type of OIC
There are 3 forms of OIC. The most common one is OIC-DATC or the Offer in Compromise- Doubt As To Collectibility. This is for people who can’t afford to pay their taxes and want to settle for less than the amount that they owe. For this, you will have to file the Offer in Compromise Form 656, attach financial statements (433A-OIC for individuals and 433B-OIC for businesses). Also, you have to submit documentation for proving your monthly income, living expenses, asset values, and liabilities.
The second form of OIC is the Doubt as to Liability, where the taxpayers think that they don’t owe the tax in question. The last type of OIC is Effective Tax Administration is for taxpayers who can pay their taxes, but it will lead to undue hardship and other extenuating circumstances.
2. You have to file all the returns
The IRS is only going to accept your Offer in Compromise request if you are in filing compliance. This means that you should have filed all your past returns. The IRS needs tax returns for at least the past 6 years. If you have a lot of past debt, it is better to wrap past debts into OIC. Also, you should file past returns before applying. Remember that if you have filed more than the past six years of tax returns voluntarily and your request is rejected, you will owe new balances and penalties.
3. The estimated tax payments should be current
When you are filing an OIC, you have to prove to the IRS that you have enough estimated tax payments or withholdings. IRS needs to know that you won’t owe them any tax when you are filing the returns for next year. If you can’t prove payment compliance, your request will be rejected.
4. Contest the owed taxes and penalties
Before you send an application for OIC to the IRS, you have to analyze your past returns and the owed balance. This can reduce the amount that you owe to the IRS. You will need a good tax professional to help you with this. If the circumstances fit, you can even request the IRS for penalty abatement. Basically, analyzing your past tax returns can drastically reduce the owed amount. You might not even need to send a request.
5. It’s not negotiation, but math
For making a decision on the Offer in Compromise, the IRS uses a concept called Reasonable Collection Potential. They need to know if the taxpayers can use their future disposable income and their net equity in assets for paying their taxes. They want to get their money back before the expiration of the statute of limitations. The concept is simple. However, determining the value of the assets, what to include in the OIC, average monthly income, allowable and necessary living expenses, etc. is difficult. The IRS will be limiting the allowable living expenses. This means that it will be scrutinizing the actual expenses in your application.
6. You won’t be able to owe taxes for the next five years
This is one of the major obstacles to get benefits from the Offer in Compromise. If, in the next five years, you owe taxes to the IRS, they will cancel your OIC. This means that you will owe all the taxes, interest, and penalties that were removed from your debt. If you are not able to make the required estimated tax payments or withhold enough, your OIC will probably get canceled when you are unable to meet the future tax obligations. This usually happens to the business owners who can’t keep up with their estimated quarterly tax payments.
7. There is a significant down payment and fee associated with the application
Filing the OIC-DATC will cost you $186. Also, while the IRS is investigating, you might have to start paying the offer amount with the application. However, this will depend on the payment method. With the application, you will have to pay the IRS 20% of the offered amount as the downpayment. In the case of periodic payments, you will have to make 24 installment payments of the offered amount. If you are a low-income applicant, you can avoid the fee as well the downpayment while the IRS is investigating your application.
If the IRS rejects your request, it will be keeping the fee and the downpayment and put them towards your tax liability. So, before you apply, you need to have an understanding of the financial costs that comes with it. If you make the payments upfront and the IRS rejects your request, you might face serious financial hardship.
You might be getting confused with all these rules and restrictions. This is, after all, a complicated process. We recommend that you take the help of professionals in this. Platinum Tax Defenders is a tax resolution service that can help you with your request. Our tax relief experts can help you make your case in front of the IRS. So, if you are facing any tax-related issues, you can contact us for an appointment today.