How to Qualify for an Offer in Compromise with the IRS

How to Qualify for an Offer in Compromise with the IRS And Reduce your Tax Debt

The IRS offers several safeguard programs for delinquent taxpayers. The IRS designed these programs for taxpayers in financial distress and for taxpayers who would suffer by the strict interpretation of the tax law.

One program is Offer in compromise or OIC. This program includes plans for taxpayers who can demonstrate that they face problems involving the ability to pay, fairness or liability.

The burden of proof rests with the taxpayer, who needs to make a payment offer, which the agency is free to reject. While it is easier than it once was to have an offer accepted, filling out the forms is no easy.

The process takes 12, 18, 24 months for a relatively straightforward offer. If the agency does not meet that 24-month deadline, the offer is deemed accepted. Until then, the IRS can look at whether a taxpayer’s ability to pay has improved since the offer was made.

The key seems to be offering what the taxpayer can pay, not how much is owed. Along with the forms, taxpayers claiming a hardship or doubt that a debt can be collected must submit some money, as well as the fee, with the application.

What is an Offer in Compromise? 

An Offer in Compromise (OIC) is an agreement between the taxpayer and the IRS, which allows the person who owes money to the tax authority to settle their debt for less than the full figure due. It is only applied when the individual cannot pay the full amount or if paying that amount will put them in unreasonable financial hardship. In order to make a decision on any OIC application the IRS looks at the applicant’s ability to pay, their income, expenses and assets.

How to Qualify? 

In order to be eligible to apply for Offer in Compromise your tax returns must be up to date, as well as your tax payment requirements. Also, you must not be in bankruptcy proceedings. If you cover all this, wait to celebrate. Even if you qualify by the rules, that doesn’t necessarily mean that your application will be accepted and you will be granted an OIC.

The most common mistake people do when calculating their equity is that they put a figure that is too high for the IRS to consider Offer in Compromise as an option. But below you can find some pointers on how to successfully get your application approved.

Take advantage of the Fresh Start Initiative

In order your offer to be accepted it needs to correspond to the realizable value of your assets in addition to your future income. With the Fresh Start initiative, for amounts that would be paid in 6 months or less the IRS will only look at your future income one year ahead. For debts that will be paid over a period of 6 to 24 months, your future income for the next 2 years will be taken into consideration. 

Make Sure Your Taxes are Current.

If you have any old tax returns that you have not filed, you must do that before you even think of applying for OIC. Failing to do that will be the easiest and quickest way to get rejected.

Don’t Put Your Tax on Hold 

It’s a common scenario with many people to acquire more debt during the collection process. It is a mistake and not only increases the amount you owe, but it also decreases your chances of getting an OIC.

Do Proper Due Diligence 

If you decide to get your application done quickly without being too careful about the numbers you put in, you are making a big mistake. The IRS is not interested in seeing any rough figures, they want exact numbers and proper calculations. You need to get it right from the first time because if you don’t, an application rejection is guaranteed and you will have to start all over again, paying the application fee and putting another down payment. That’s already getting your financial situation worse.

Don’t skip the fees 

Speaking of the fees you need to pay, it is very important you don’t forget to include the application fee $186 and the non-refundable initial payment because they will directly affect your tax liability. In your application, you can specify which tax year and debt you want to apply the fees to.

Don’t Try to be Comfortable

Another common mistake is applying for Offer in Compromise for the sake of not putting too much pressure on their current financial situation if they paid the debt in full. If the IRS knows that paying what you owe is not going to put you in bankruptcy or leave you and your family in financial distress, you will not be granted OIC. This option is reserved for people who genuinely have no way of paying their debt, even after they’ve taken loans from friends and relatives. Your chances of being approved are highest when you can prove that you’ve done all you can do but your income is not enough to cover your basic living needs.

Your Reasons Matters

It is crucial for your application to provide good reasons as to why you need your Offer in Compromise to be approved. Unfortunately, things like “we are in recession” and “my business is not doing so well at the moment” will not get you the outcome you desire. IRS officers will look at the probability of your financial situation bettering in the future and base their decision on that. However, if you quote reasons like dependent care, substance abuse, reduced possibility of increasing income due to old age, disabilities and serious health problems will be considered as valid reasons for granting you an OIC.

Don’t do it Yourself 

If you are in a really hard financial situation it looks like the most logical thing is to try and deal with the application yourself without seeking professional help with it. In reality, though, those few buck you will save on a good CPA charges, can cost you a lot more if you get things wrong. And not only that, even if you manage to get your application on point, don’t forget that the IRS officers will always put the interest of the government before yours. They are well-experienced in pressuring taxpayers to their limits when it comes to collecting debt, so you are better off having a professional financial adviser on your side who will not be easily intimidated by the IRS workers.

We hope this gives you a base on where to start from if you want to write off some of your debt. If you need more clarification and help with your application, you can always contact us for best results.

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How To Request The IRS for Acceptance Of Your Offer To Lower Your Tax Debt

The OIC (Offer In Compromise) Process

The OIC was developed for taxpayers who cannot pay their tax debts without significant financial peril. Today, the IRS acceptance rate for OICs is almost 41% – up from 25% ten years ago.  In real terms, they rejected 34,000 offers in 2018. However, they did accept nearly 24,000 offers and in the process, collected $261.3 million in compromises. 

Several elements have to be evaluated before you can build a successful proposal.

  1. An OIC proposal is made on Form 656 (Offer in Compromise) and includes Form 433-A (OIC) along with the required supporting documents, to help the IRS to consider all the factors they look at including your:
  2. Income
  3. Expenses
  4. Asset Equity
  5. Lifestyle

If your lifestyle suggests that you can pay your taxes providing you become a bit more austere, the IRS might reject your OIC.  If they do, it is worth wile to pursue the option to come to an agreement with the IRS to pay them in installments.  If you do, please consider the Six-Year Rule (allowing for payments of living expenses, student loan and credit card in excess of the collection financial standards providing the tax debt is paid in 6 years) in combination with the One-Year Rule (IRM 5.14.1.4.1) carefully, which states:

  1. Age
  2. Education
  3. Collection Statute Expiration Date

This form requires a lot of sophisticated financial calculations and if you make a mistake with any of the numbers, the whole process is stranded. You must do it right even if you have to employ an outside professional to help you.

Never leave a blank space on any of the forms for any reason whatsoever. The IRS officer will have no idea why you did not fill out the space.  When applicable, write a zero or N/A in these spaces.

If your property is underwater and worth less than you owe on it, YOU CANNOT subtract your negative equity from your ‘net realizable equity, (NRE).  You cannot do it!  You have to report any negative asset as ‘ZERO.’

Your supportive documents should ‘prove’ every aspect of your case and every figure you rely upon.  Use the Internal Revenue Manual for references to back up the foundation of your case. This is vital.

Is The OIC Intended For You?

The IRS will typically accept a proposal that promises to bring in the ostensible maximum amount of money from the taxpayer, in the shortest time frame possible, if there is doubt as to the collectability of the revenue or the liability of the tax, or if it seems to be in the interest of effective tax administration.

What Does This Mean?

It means:

  1. You cannot pay the full amount outstanding.
  2. You do not actually owe the total amount outstanding.
  3. According to a unique set of circumstances, your offer is in the best interest of all the parties involved.

Are You Eligible?

The eligibility requirements are:

  1. You filed all your tax returns.
  2. You received a bill for at least one tax debt included in your proposal.
  3. You must pay all the required estimated taxes for this tax year.
  4. You must make all your required federal tax deposits for this year (if you are a business owner or employer).

Tips

You need to fill in a legion of tax forms during an application:

  • Form 656: Offer in Compromise.
  • Form 433-A (OIC): Collection Information Statement for Wage Earners and Self-Employed Individuals. The IRS uses this to determine the extent of your ‘financial hardship.’
  • Form 433-B (OIC): Collection Information Statement for Business.

Do Not:

During your application, you have to provide facts and Internal Revenue Manual references in support of your case. Do not:

  • Make math errors. Form 433 requires complex calculations. Any mistakes will stop the application until corrected.
  • Leave blank spaces.
  • Subtract negative equity: If you owe more on a property than it’s fair market value, you cannot subtract the negative equity. Report it as zero.

Check Our IRS Tax Relief Service

First Refusal

If you receive a rejection notice to inform you that your OIC has been rejected, you can appeal this decision by filing a Form 13711 within thirty days of receiving the notice.  If an appeal is granted, you will get the opportunity to renegotiate your offer under more favorable terms – for the IRS.

To justify an appeal, you have to provide documentation as a reference for the IRM (Internal Revenue Memorandum), IRC (Internal Revenue Code) and court decisions you base your request on.  If you have no references from the IRM and IRC left, use case law to persuade.

The human side of your circumstances, although not unimportant, should not be the main thread of your argument – only the ‘cherry on top.’

Tip From An IRS Insider

I never lost an appeal hearing when I rooted my arguments in the IRM and the IRC.  Expect your IRS case officer to do the same. Prepare well.

What If Your Request For An Appeal Is Rejected?

There are several options to consider, each with specific requirements:

  • Installment agreements:

For taxpayers who owe $50,000 or less, this will give them up to 72 months to pay off their tax debt.  If the statute of limitations cut their repayment short, they can waive it.  For taxpayers who owe $50,000 to $100,000, payment plans of up to 84 months are available.

  • Payment Extension:

If all you need is some more time to pay your debt, and your account is not already in the care of IRS Collections, you can apply for an extension of up to 120-days. Otherwise you can apply for a 60-day extension.

  • Currently not collectible status:

The IRS can award you this status if you owe back taxes and cannot afford to pay. The IRS sometimes grant this status to taxpayers the IRS cannot locate or who died without heirs.  This status leads to the end of all collection efforts until further notice.  Only those who suffer significant hardship will qualify.

Readers should note that this article is only intended to convey general information on these issues and that FAS CPA & Consultants (FAS) in no way intended for the contents of this article to be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services.  This article cannot serve as a substitute for such professional services or advice.  Any decision or action that may affect the reader’s business should not rely solely on the contents of this article, but should rather be consulted on with a qualified professional adviser. FAS shall not be responsible for any loss sustained by any person who relies on this presentation.  This article is subject to change at any time and for any reason.

If you have any questions in relation to your IRS debts, send them to us. 

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Fulton Abraham Sanchez, CPA

Fulton Abraham Sánchez, CPA I am Certified Public Accountant, specialized in Tax Planning & Offshore Strategies for Real Estate, Hedge/Equity Funds, Fintech, Crypto, Expats, IRS Debt Resolution. You can email me fa@fascpaconsultants.com and follow us on Facebook : FAS CPA & Consultants.

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