It is quite a tedious situation when you find yourself owing taxes to the IRS and sometimes when your circumstances are genuinely unfavorable, every opportunity for debt relief is welcomed. This is why many people are applying for the IRS Offer in Compromise (IOC) to be able to settle their debt in a way that hurts their personal finances less. The sad reality, however, is that not everyone is eligible and there are specific requirements to be met in order to qualify and be approved. Although the rules are set out very clearly, most times applying them creates confusion in the ordinary taxpayer.
What is an Offer in Compromise?
An Offer in Compromise 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 asset equity.
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 you 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 considerOffer in Compromise as an option. But below you can find some pointers on how to successfully get your application approved.
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. To verify if you qualify for an IRS OIC use thisIRS pre-qualifier tool
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 too.
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.
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 one of our trained CPAs for best results.
Fulton Abraham Sánchez, CPA is a Certified Public Accountant, specialized In Tax Planning, International Business, Wealth Management and Offshore Banking. You can email him to email@example.com or follow us on Facebook : FAS CPA & Consultants.