Offer in Compromise
What is an Offer in Compromise?
In 1992 the IRS added an option to the tax code called an Offer in Compromise “OIC”. An OIC is an agreement between a taxpayer and the IRS that settles the taxpayer’s tax debt for less than the amount owed. There are three types of OIC. Doubt as to collectability, doubt to liability and Effective tax administration.
When an Offer in Compromise is accepted, it can be a godsend. However, it is not a solution that works for everyone. To qualify, you must be able to show the IRS you can’t, or shouldn’t be required to pay the debt.
Five Steps to your Tax Freedom
How do I get an OIC approved?
The process is somewhat complicated and requires knowledge of IRS guidelines. Age, income, expenses, health, actions of a spouse, work history, divorce, and assets are all taken into account by the IRS. Essentially, an OIC is accepted if the IRS thinks they cannot, or should not collect the tax. There are legitimate things you can do to improve your chances of getting an OIC, but you need to know the rules.
You cannot plan for an OIC, it is a violation of the IRS regulations. You cannot hide assets, nor transfer assets to another party. It may be wise to seek the help of a professional.
The IRS has a link for an OIC pre-qualifier, but it leaves out many components. You can find it here http://irs.treasury.gov/oic_pre_qualifier/
Is an OIC always the best option?
The simple answer is no. An Offer in Comprise may not be the best option. Filing an OIC is technical. Doing it wrong, or unknowingly thinking you are eligible can cost you time and money, not to mention the psychological toll of dealing with a problem that will not go away.
Collection Statute Expiration Date (CSED). This is the statute of limitations on your debt. The IRS has ten years from the time of assessment of the tax debt to collect, and an OIC tolls the statute of limitations. Depending on where you are in relation to your CSED date, an OIC might cause a harmful delay.
Bankruptcy in some cases may be a better option. However, you need to understand what debt can be discharged. It is the three-two rule which pertains to when was the tax was assessed, and when were the returns filed. All taxreturns must be filed before you can claim bankruptcy.
Partial Payment Plan or Non-Collectible status can often be better options than OIC. With a small payment, or no payment at all, you can ‘run’ the statute of limitation without an OIC.
Companies are telling me I can settle for ‘pennies on the dollar’ Is this true?
It is buzz phrase used to market to people who are in a desperate situation. Successful Tax Resolution Experts hate the phrase. It is possible to settle for pennies on the dollar, but your circumstances must be right. An Offer in Compromise can be a complex process. You need a clear and thorough evaluation before you waste time.
If someone tells you pennies on the dollar, get it in writing!
How long does an OIC take?
The IRS has 24 months to approve or deny your offer. Most offers are accepted or denied in 6-12 months.
Remember, filing an Offer will stop the clock on the statute of limitations.
What do I do if the IRS denies my OIC?
-You can appeal. -You can resubmit offering more money. -You can hire a expert. -You can opt for a payment plan, non-collectible status, etc.
Can I file for an OIC if I am in bankruptcy?
No. If you are in bankruptcy the bankruptcy court controls everything. You cannot do anything relating to your finances without the approval of the bankruptcy court.
Is Fresh Start and OIC the same thing?
No. The Fresh Start Program amended several different IRS programs, including OIC. But the Fresh Start Program is not a resolution in and of itself. Its function was to make tax debt relief easier.
Some of the things the Fresh Start Program did:
- Extend the installment repayment plan from 60 months to 72 months.
- Provided for a streamline payment plan that requires limited financial documentation.
- Raised the amount owed to qualify for a streamline payment plan from $25,000 to $50,000
- Allows for penalty abatement in some cases.
- Made the OIC process easier.
Can I get an OIC for my state taxes?
Possibly, but all states have their own rules. Unfortunately, there is no uniformity. States can be more difficult to deal with than the IRS. When you call the State Department of Revenue you can get a person with any level of competency.
In some states, you can only submit an OIC after the IRS approves an OIC. States will usually allow you to use IRS forms when submitting an OIC to them. So, as big and bureaucratic as the IRS is they have guidelines that are uniform.
Do I have to file all my tax returns before submitting an OIC?
Yes. You have to be compliant. That means all your returns have been filed up to date. For self-employed people, you must also be current on paying your estimated quarterly payments.
If I get an OIC what do I have to do going forward?
File your tax returns on time and pay any tax due for the next five years. If you don’t, the IRS can default your OIC settlement and you are back to square one. If the IRS is going to waive off portions of your debt they don’t want to see you right back in the same situation.
Should I try an OIC on my own?
It is estimated that taxpayer submitted offers are accepted 14% of the time. This number goes up dramatically if done by an experienced firm. If your case is simple and you understand the process and forms, take a shot. You can find all the forms under IRS.gov Take note that an OIC may not be your best option.
If you want to go it alone here are some documents to get you started. Form 656 booklet that goes into detail about the OIC process https://www.irs.gov/pub/irs-pdf/f656b.pdf. Form 433-OIC financial document you will need in conjunction with the 656. https://www.irs.gov/pub/irs-pdf/f433a.pdf. Form 433B-OIC for business https://www.irs.gov/pub/irs-pdf/f433b.pdf.
If I am submitting my OIC on my own are there documents I need to provide?
Here is a short list of items you might need to provide:
- Bank statements
- Utility bills
- Car payment
- Health insurance costs
- Proof of payment of Alimony or Child Support
- Auto insurance statement
- Any court ordered payment
- Rent or mortgage payment
- Property tax bill
- Property insurance bill
- Renter’s insurance bill
- Rental agreement
- Proof of any other payment for living expenses
- Divorce decree
- Verification of retirement accounts
- Verification of social security or pension received
- Life insurance information
If I hire a Tax Resolution Specialist what will it cost?
The cost can vary considerably. The overall complexity of your case is the main factor, and different companies charge differently. A word of caution; cheapest is usually not the best. You want to hire someone who charges fairly but equally important is they get the job done.
Costs can run in the range of $1,500 to $10,000, and up.