Life can be expensive—student loans, mortgage payments, buying a car, food, insurance. On top of these costly expenses, you’ll also receive a yearly visit from Uncle Sam asking for his fair share of your hard-earned income. With all of these bills adding up, paying taxes to the IRS can be put on the backburner. While falling behind on your taxes is never an ideal scenario, it might be your reality. Fortunately, there are ways you can climb out of debt from the IRS with tax relief programs, such as an Offer in Compromise.
In simple terms, an Offer in Compromise (OIC) can help you gain tax relief by settling your tax debt for less than the amount you owe. So, how low is the IRS willing to go? In this post, we’ll provide Offer in Compromise advice, such as how to get an Offer in Compromise approved and how much you should Offer in Compromise to the IRS.
You can read through to learn about all of our Offer in Compromise tips, or use the links below to jump to a section that may provide the Offer in Compromise help you need.
- When can I make an Offer in Compromise?
- How to calculate OIC amount
- How to pay your Offer in Compromise
- Other Offer in Compromise tips
- Mistakes taxpayers make during OIC
- Community Tax can help
When can I make an Offer in Compromise?
The Offer in Compromise program is part of the IRS’s Fresh Start Initiative, which is a series of changes to collection procedures by the IRS to help taxpayers and businesses settle overdue tax liabilities. You can make an Offer in Compromise when you determine that you are eligible after meeting the IRS’s strict requirements.
The IRS may accept your Offer in Compromise if you meet one of the following OIC eligibility requirements:
- Doubt as to Liability: If you doubt the assessed tax liability is correct, you may be able to file an Offer in Compromise. The mistake may have resulted from an examiner error of the tax code, an examiner neglecting to utilize all the evidence presented, or if you found new documents to prove the tax debt assessed was incorrect.
- Doubt as to Collectibility: Before you can get approved for an Offer in Compromise, the IRS will decide whether they can collect a higher amount through forced collections. If your Offer in Compromise doesn’t garner a higher amount, it most likely won’t be collected.
To prove you cannot pay the full tax debt owed, the IRS will look at your reasonable collection potential (RCP), which is where they look at your net equity in assets and your projected monthly disposable income. If your RCP shows that you won’t be able to pay your debt in full by the time the collection statute expires, or if your total assets or income are less than you owe, they will most likely accept your Offer in Compromise.
- Effective Tax Administration: In this case, there is no doubt regarding the tax amount owed. However, if the IRS finds that forced collection would cause financial hardship, they are more likely to consider accepting your Offer in Compromise to ensure you can meet your basic needs.
So, in which situation should you request an Offer in Compromise? When you can prove that you meet one of these criteria. Taxes are used for a variety of social programs, such as Social Security, Medicare and Medicaid, and community development, along with other areas like national defense, law enforcement, and veterans affairs.
The IRS is not quick to approve Offers in Compromise, and in the absence of a tax mistake, your financial situation must be noticeable dire to qualify in most cases. Why? The federal government needs sufficient funds to keep the above mentioned programs up and running. However, proving there was an error in the tax amount owed, that you can’t pay the full amount, or that paying your back taxes will cause financial hardship can result in an accepted Offer in Compromise.
How to calculate OIC amount
How much should you Offer in Compromise to the IRS?. You can calculate a minimum offer amount using Form 656, Offer in Compromise, to determine an amount that the IRS will accept.
To calculate your OIC amount, you will also have to complete Form 433-A OIC, Collection Information Statement for Wage Earners and Self-Employed Individuals, which requires the following information:
- Section 1: Personal and Household Information
- Section 2: Employment Information for Wage Earners
- Section 3: Personal Asset Information
- Section 4: Self-Employed Information
- Section 5: Business Asset Information (for self-employed)
- Section 6: Business Income and Expense Information (for self-employed)
- Section 7: Monthly Household Income and Expense Information
Businesses, on the other hand, must fill out Form 433-B OIC, Collection Information Statement for Businesses, which requires the following information:
- Section 1: Business Information
- Section 2: Business Asset Information
- Section 3: Business Income Information
- Section 4: Business Expense Information
Once your financial information is tallied up, you’ll move onto Section 8 if you’re an individual taxpayer or Section 5 if you’re a business, to calculate your minimum offer amount. If you will pay a lump sum in 5 or fewer payments within 5 months or less, multiply your “remaining monthly income” by 12 to get your “future remaining income.”
If you plan on making periodic payments within 6 to 24 months, multiply your “remaining monthly income” by 24 to get your “future remaining income.”
Once you have your future remaining income calculated, add that amount to the sum of your available equity in assets and/or your available business equity in assets, if applicable. Once these boxes are added together, you’ll have your Offer in Compromise amount.
Let’s look at a few scenarios to help you visualize how to calculate an Offer in Compromise amount:
You’re a single taxpayer with no dependents and a tax debt of $50,000. Your equity in assets is $7,000, and you have a disposable income of $400 a month. You plan to pay your Offer in Compromise with a lump sum payment.
To calculate your Offer in Compromise with a lump sum payment, multiply your remaining monthly income of $400 by 12, which will make your future remaining income $4,800. Then, add this to your available equity in assets, which is $5,000, to get a total of $9,800. Your Offer in Compromise will take your tax liability from $50,000 to $9,800.
You’re a single taxpayer with no dependents and a tax debt of $50,000. Your equity in assets is $7,000, and you have a disposable income of $400 a month. You plan to pay your Offer in Compromise with periodic payments.
To calculate your Offer in Compromise with periodic payments, multiply your remaining monthly income of $400 by 24, which will make your future remaining income $9,600. Then, add this amount to your available equity in assets, which is $5,000, to get a total of $14,800. Your Offer in Compromise will take your tax liability from $50,000 to $14,800.
Instead of calculating the appropriate amount yourself, let our team of experienced tax experts help. We’ve worked with thousands of clients to settle tax debt with the IRS, and we know who to call, and what to offer to get your debts resolved sooner.
How to pay your Offer in Compromise
When it’s time to sign on the dotted line and send your payment to the IRS, there are two payment options you can choose between. Additionally, you must pay an application fee of $205. The two payment options include:
- Lump Sum Cash Offer: If you choose to pay your Offer in Compromise with a lump sum payment, you must pay your balance in 5 or fewer installments within 5 months or less after the offer is accepted. With a lump sum payment, you will fill out IRS Form 656 and a nonrefundable payment equal to 20 percent of the offer amount, along with the application fee. The nonrefundable 20 percent payment will be put toward your tax liability, even if your offer is denied. You can also specify which tax liability you’d like to 20 percent payment to go toward.
- Periodic Payment Offer: If you choose the periodic payment offer, you must pay your balance in 6 or more installments within 6 to 24 months after the offer is accepted. When you send your periodic payment offer, you must include the first proposed installment payment along with Form 656, in addition to the application fee. Similar to the 20 percent payment required for the lump sum cash offer, the first proposed installment payment is nonrefundable and goes toward your tax liability.
However, while the IRS is reviewing your periodic payment offer, you must continue to make install payments provided under the terms of the offer, which are nonrefundable and go toward your tax liability, which you can specify.
With two options to choose from, you may be wondering which payment offer is best for your situation. Our Offer in Compromise advice is to choose the lump sum cash offer if you can. In most cases, the lump sum cash offer saves more money, as you can tell in scenario one from the previous section. However, if you can’t afford the 20 percent down payment and pay off your tax liability within 5 months, the 24-month option might be the best option for your situation.
Additionally, if you can’t afford the $205 application fee, which became effective on April 27, 2020, you might be able to qualify for the low-income certification or submit a Doubt as to Liability offer. To qualify for the low-income certification, you must be an individual (not a corporation, partnership, or other entity) and meet one of the two criteria:
- Your adjusted gross income from the most recent taxable year falls at or below 250 percent of the poverty guidelines published by the Department of Health and Human Services.
- Your household’s gross monthly income x 12 months falls at or below 250 percent of the poverty guidelines published by the Department of Health and Human Services.
Other Offer in Compromise tips
Filing for an Offer in Compromise is complex. It requires copious amounts of documentation and time, and in the end, the IRS can still reject your offer. Take a look at our Offer in Compromise tips to see how to get an Offer in Compromise approved:
- Get help from a tax professional. Tax professionals are skilled at what they do, and they can provide Offer in Compromise help to get you the best solution and offer. While you can certainly figure out how to file your OIC by yourself, understanding the legal jargon and calculations can be tricky. At Community Tax, our tax representatives are experienced and will always put your best interests front and center. Our team of tax professionals won’t be intimidated by the IRS’s tactics to get the most money out of you, and will protect your rights to get the best settlement. Contact us today.
- Be thorough. In order for your Offer in Compromise to be approved, you need to submit various forms and proof to show the IRS you can’t pay your tax liability in full. Our Offer in Compromise advice is to take your time and do your due diligence. Every number you input on your Offer in Compromise form, such as the worth of your assets and how much you earn in wages, needs to be supported with proper documentation. If the IRS finds anything inaccurate or false, they will reject your application, and you will have to start over.
- Provide a good reason. The IRS isn’t going to accept any reason if you’re unable to pay off your entire balance. You need to convince them with solid evidence that you’re unable to pay your tax liability in full. At the end of the day, remember that people just like you work for the IRS, so you can communicate with them directly to plead your case. Some reasons you may not be able to pay your overdue taxes in full include disabilities, dependent care, severe health matters, large balance amounts, and limited income potential due if you’re of an older age.
- Be patient. IRS representatives evaluating your Offer in Compromise take a considerable amount of time due to the complexity of the situation. They need to make sure the statements made on your forms are accurate, which requires fact-checking and expertise, which can take several months, so be patient.
With these Offer in Compromise tips, you’ll be one step closer to getting your offer approved. However, make sure you avoid some of the common mistakes taxpayers make during OIC in the section below.
Mistakes taxpayers make during the OIC process
The Fresh Start Initiative made it easier for taxpayers to apply for tax relief through programs like an IRS Installment Agreement and the Offer in Compromise program. However, applying for these relief programs can be complicated. Review some of the common mistakes taxpayers make when requesting an Offer in Compromise:
- Accumulating more tax debt: Even though you’re in the midst of applying for tax relief, you want to make sure you stay on top of your current taxes. If the IRS sees you’re adding more to your tax bill, they might reject your offer. Plus, falling behind on your taxes can sink you further into debt with tax penalties, fees, and accrued interest.
- Failing to file returns: In order to get your Offer in Compromise approved, you need to make sure you filed all of your tax returns, even for previous tax years. Filing your taxes is a legal requirement, and if you fail to file your tax return, you’ll have to pay a failure to file fee.
- Making mathematical errors: This goes without saying, but a mathematical error is one of the easiest ways for the IRS to reject your offer. Whether it’s you or a tax professional filling out your Offer in Compromise proposal, make sure everything adds up and is in line with your supporting documents.
- Leaving blank spaces: A blank space on Form 656 or Form 433 will raise an immediate red flag because the IRS will think you’re hiding information. Make sure every line is filled out completely, and if you’re unsure, get help from a tax professional.
- Ignoring all your choices: An Offer in Compromise is a great tax relief solution. However, it might not be the best solution for your scenario. Before applying, make sure you weigh your options and look into other tax relief solutions, such as Currently Not Collectible Status, Installment Agreements, Penalty Abatements, and bankruptcy.
- Giving up. If your Offer in Compromise was rejected, don’t give up. After your offer was rejected, you have 30 days to appeal the IRS’s findings and negotiate an alternative deal that can still save you money. Make sure all of your evidence and supporting documents are organized in a logical fashion to best persuade the IRS.
Community Tax Can Help
Drowning in tax debt is never ideal. Fortunately, the IRS and their Fresh Start Initiative provide taxpayers in your situation a way to find tax relief. One such way is through an Offer in Compromise. Community Tax’s seasoned professionals are here to help you draft a compelling and persuasive OIC to obtain tax relief and get a fresh start.
We’ll provide Offer in Compromise help to make sure every form is filled out accurately, and will also assist you in deciding what relief option is best for your situation. We’ll look at every tax resolution avenue you can take, such as Installment Agreements, Penalty Abatements, and Currently Not Collectible Status, in addition to Offers in Compromise.
Call us today to get one step closer to tax relief at 844.325.2970.