The federal government does not wish to bankrupt you. Nor does the government wish to create unfair financial hardship for you. At the same time, the government would like to collect at least a portion of the outstanding tax debt owed. The IRS Offer in Compromise program is designed to help alleviate some of the burden of outstanding tax debt for taxpayers experiencing hardship while still ensuring the IRS receives some of the revenue needed to sustain the country’s government. An offer in compromise isn’t easy to secure. In fact, it’s estimated that only one in every five applicants for the program are approved. Nevertheless, it’s entirely possible you may qualify and it’s certainly worth investigating if applying for the program makes sense for you.
What Is An IRS Offer In Compromise?
An IRS offer in compromise (IRS OIC) is a type of tax relief that allows a taxpayer to settle tax debt with the IRS for less than the full amount owed. The IRS is provided authority to settle tax liabilities under 26 U.S.C. section 7122(a).
- This program also allows taxpayers that do not agree that they owe the tax a chance to file an Offer in Compromise and have their tax liabilities reconsidered.
- The Offer in Compromise program allows taxpayers to get a fresh start.
- All back tax liabilities are settled with the amount of the Offer in Compromise.
- Federal and state tax liens are generally released upon acceptance of an Offer in Compromise and payment of the amount offered.
- Taxpayers can compromise all types of taxes, penalties and interest.
- Even payroll taxes and civil penalties from payroll taxes can be compromised.
The program is certainly appealing to taxpayers with a large amount of outstanding tax debt. However, the program isn’t meant to provide anyone and everyone with relief from tax debt. Generally speaking, the IRS cannot accept a settlement offer if the taxpayer can afford to pay all of what they owe.
When deciding whether to accept or reject an offer, the IRS will evaluate three things:
- Ability to pay and doubt as to collectibility: The IRS will compute a taxpayer’s ability to pay based on reasonable collection potential (RCP). The IRS likely won’t accept an offer if it is less than the reasonable collection potential.
- Certainty regarding the liability: The IRS will take into account whether or not tax debt exists or the amount of tax debt is correct based on the applicable tax code provisions.
- Hardship, equity, or exceptional circumstances: The IRS will also evaluate whether or not paying the tax debt will create hardship or some form of inequity.
The three aspects that the IRS evaluates gives rise to three different types of offer in compromise.
Types of Offers In Compromise
Doubt As To Collectibility Offer In Compromise
The most common form of offer in compromise is an offer for doubt as to collectibility. This type of offer in compromise is also the easiest to earn. Often, even if there is a chance for a doubt as to liability or effective tax administration offer, an attorney will still prefer to file a doubt as to collectibility offer. For this type of offer, the IRS will consider your reasonable collection potential.
Reasonable collection potential is the amount the IRS can expect to collect from you (based on the IRS Collection Financial Standards) before the collection statute expiration date. The standards are comprised of national and local standards for expenses such as housing, food, clothing, transportation, etc. In calculating expenses to calculate reasonable collection potential, you should use the lesser of what you pay or the national or local standard. Unless higher amounts can be substantiated as “necessary”, you should not use an expense above the standard. The basic formula for calculating reasonable collection potential is as follows:
Reasonable collection potential = (gross monthly income – reasonable monthly expenses) x 120 + equity in assets
The IRS will have 10 years to collect the debt, which is where the 120 comes from. The reasonable monthly expense amounts will be based on the financial standards. If your assets outweigh the total tax debt, or you have high rent or mortgage, you likely won’t qualify for this type of offer in compromise.
Doubt As To Liability Offer in Compromise
If you have reason to believe that the tax amount the IRS says is owed is incorrect, you can file an offer for doubt as to liability. Doubt as to liability may arise if you believe an audit was conducted incorrectly or returns were improperly filed. The IRS prefers that you attempt alternative methods of resolution before filing this type of offer. The IRS offers alternatives to filing a doubt as to liability offer on page three of Form 656L. If there is already a final court judgement or decision on your case, you will not be able to file a doubt as to liability offer.
Effective Tax Administration
An effective tax administration offer in compromise is essentially a plea for help when you don’t meet the requirements for a doubt as to collectibility offer. You can file an effective tax administration offer if you have the means to pay back all of your tax debt, but doing so would cause extreme economic hardship. An effective tax administration offer may be warranted if:
- The taxpayer has income, but the income is exhausted taking care of dependents with no other means of support.
- The taxpayer has a disability, medical condition, or long-term illness that prevents them from earning a living.
- The taxpayer has assets that if liquidated would render the taxpayer unable to meet basic living expenses.
This type of offer is extremely hard to earn and is often unsuccessful. You’ll need to articulate an extremely good reason for the IRS to forgive debt you could otherwise pay in full.
How Much Will The IRS Settle For In An Offer In Compromise?
In 2017, the IRS accepted 25,000 offers, which amounted to $256.862 million. If you divide that amount by 25,000 you get an average settlement amount of $10,274.48. Of course, each case is going to vary greatly depending on the amount of tax debt and the circumstances surrounding the tax debt. You can view our past offer in compromise results to see that settlements range anywhere from $2,000 to $51,000 and above. Likewise, the tax savings also vary. For a doubt as to collectibility offer, the IRS will not settle below reasonable collection potential. If your offer is a doubt as to liability offer, the IRS will not settle below what the correct tax should be. An attorney can analyze your unique situation to help you better determine what kind of offer the IRS will settle for.
Do I Qualify For An IRS Offer In Compromise?
You can perform a basic self-assessment to determine whether or not you meet the threshold requirements for the offer in compromise program. There are a number of pre-qualifiers you must meet to be eligible for the program. If you answer yes to any of the pre-qualification questions below, you likely won’t qualify for the program:
- Have you failed to file any required federal tax returns?
- Have you failed to make any required estimated tax payments?
- Do you have an open bankruptcy proceeding?
- Have you failed to provide all required federal tax deposits for employment taxes (if applicable)?
Of course, it would not be wise to only consider the basic self-assessment when determining if you qualify. An IRS tax attorney can review your case in depth to help you determine if an offer in compromise makes sense for you.
How to Apply For an IRS Offer in Compromise in California
If it appears you qualify for an offer in compromise, you can apply by filing Form 656B, otherwise known as the offer in compromise booklet. Your completed application will include:
- A completed 656 for personal tax debt and/or business tax debt (if both they will need to be on separate forms)
- A completed Form 433-A (for individuals) or Form 433-B (for businesses)
- Evidence and documentation requested in Form 433 A or B
- A non-refundable application fee of $186 along with initial payment for each 656 submitted
Proper evidence and supporting documentation will be crucial in getting an offer in compromise accepted. Your attorney will help you compile evidence and fill out the required forms.
Why Trust RJS LAW To Represent You?
Filing and negotiating an offer requires an extensive background in Federal Tax Procedure. Your tax professional must know the laws and Internal Revenue Manual guidelines for the various methods that the IRS uses to evaluate reasonable collection potential.
Be wary. There are many scams associated with the Offer in Compromise program that are promoted by third parties. Many national tax agencies will offer to settle your tax debt for pennies on the dollar and will quote an affordable price for preparation. However, this fee does not include many of the hidden extras associated with the offer process. Most national tax agencies only prepare the tax forms associated with an Offer in Compromise and will not pre-screen offers for acceptance, review substantiation documents, negotiate with the IRS after the initial determination, or guide you through the appeals process should your offer not be accepted. We have encountered a number of these scams in our daily practice and encourage taxpayers to be vigilant when choosing tax counsel to represent them in the offer in compromise process. For more information, please see our page on National Tax Agencies.
Upon retaining us, all potential offer candidates go through a rigorous financial analysis to determine if an offer in compromise is right for you. We work intimately with our clients to draft an offer that is carefully tailored to your individual situation and we will also help you gather the necessary supporting documentation. Once the federal or state government has processed your offer, our skilled negotiating team will work diligently to get you the best possible resolution. Because we only file quality offers and are extremely experienced in preparing them, we have a high success rate with both federal and state tax authorities. Let our reputation and our record work for you.
Don’t wait. If you qualify for the Offer in Compromise program you can save thousands of dollars in taxes, penalties and interest. If you have any questions or if we can further assist you, contact RJS Law today filling out a contact form or calling one of our offices to setup a complimentary case evaluation with one of our IRS tax attorneys.