THE IRS REQUIREMENTS ON OFFER IN COMPROMISE
Life can be really expensive—student loans, mortgage payments, buying a car, food, clothes, insurance. With all of these bills summing up, paying taxes to the IRS can be really difficult. While falling behind on your taxes is never a perfect scenario, it might be your reality. Fortunately, you can climb out of debt from the IRS with tax relief programs, such as an OIC. Simply put, an Offer in Compromise (OIC) can aid you in gaining tax relief by settling your tax debt for less than the amount you owe.
When can I make an Offer in Compromise?
The OIC program is part of the IRS’s Fresh Start Initiative, which is a series of changes to collection measures by the IRS to aid taxpayers and businesses settle overdue tax liabilities. You can make an OIC when you determine that you are qualified after meeting the IRS’s strict requirements.
The IRS may grant your OIC if you meet one of the following OIC eligibility requirements:
1. Doubt as to Liability
If you do not trust that the assessed tax liability is correct, you may be able to file an Offer in Compromise. The error 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 inaccurate.
2. Doubt as to Conductibility
Before you can get an approval for an Offer in Compromise, the IRS will decide whether they can collect a higher amount through forced collections. If your OIC does not garner a higher amount, it most likely won’t be collected.
To verify 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, they will most likely accept your OIC.
Effective Tax Administration
In this case, there is no doubt as regards the tax amount owed. However, if the IRS discovers that forced collection would cause financial difficulties, they are more likely to consider accepting your Offer in Compromise to make sure you can meet your basic needs.
So, in which case should you request an OIC? 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 other 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 pay your OIC There are two payment options for an OIC. They include:
Lump Sum Cash Offer:
If you opt to pay your OIC with a lump sum payment, you must pay up 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 total, 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 indicate which tax liability you’d like to 20 percent payment to go toward.
Periodic Payment Offer
If you opt for the periodic payment offer, you must pay up 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 spell out.
With two options to choose from, you may be wondering which payment offer is best for your situation. 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.
In addition, if you can’t afford the $205 application fee, which became effective on April 27, 2020, you might be able to be eligible 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 tips on Offer in Compromise
Filing for an OIC is difficult. It requires numerous amounts of documentation and time, and in the end, the IRS can still reject your offer. Take a look at our OOIC tips to see how to get an OIC approved:
Get help from a tax professional
Tax professionals are experienced at what they do, and they can provide OIC aid 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 difficult.
Be thorough
For your OIC to be approved, you need to submit various forms and proof to show the IRS you can’t pay your tax liability in full. Every number you input on your OIC 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 discovers anything erroneous or false, they will reject your application, and you will have to start over.
Provide a good reason
The IRS is not going to accept any reason if you’re unable to pay off your entire balance. You need to convince them with solid proof 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 appeal 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.