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Offer in Compromise

Offer in Compromise

The Federal Government, like other creditors, encounters situations where an accounts receivable cannot be collected in full or there is a legitimate dispute as to what is owed. It is an accepted business practice to resolve these issues through compromise. The Offer in Compromise is a tool that the Federal Government uses to collect unpaid taxes.

Managing tax debt can be one of the most challenging aspects of dealing with personal or business finances. While there are many strategies to handle tax obligations, an IRS Offer in Compromise (OIC) stands out as a viable solution for those who cannot pay their full tax liability.

To apply for an IRS offer in compromise, you need to complete Form 656, which details your financial situation and the proposed settlement amount.

This guide will explain what an OIC is, how to apply for it, and how to negotiate effectively with the IRS to improve your chances of acceptance, providing you with a clear pathway to manage your tax debt and achieve financial stability.

WHAT IS AN OFFER IN COMPROMISE (OIC?)

  1. An Offer in Compromise is an agreement between a taxpayer and the government that settles a tax liability for payment of less than the full amount owed.
  2. The Collection Division of the IRS handles most of the OIC cases for the Internal Revenue Service.
  3. The Examination Division will also handle certain type of OIC’s as discussed below.

An Internal Revenue Service Offer in Compromise (OIC) is an agreement between a taxpayer and the government to settle a tax liability for less than the full amount owed.

The process of OIC is handled primarily by the IRS Collection Division and, in specific cases, by the Examination Division.

FORMS TO USE FOR AN IRS OFFER IN COMPROMISE

Filing an IRS Offer in Compromise (OIC) requires specific forms, and it’s crucial to get them right to avoid any hassle from the IRS. Here’s what you need:

 

  • Form 656, Offer in Compromise: This is your main form when you’re submitting an OIC based on doubt as to collectibility or effective tax administration.
  • Form 433-A (OIC): This is the Collection Information Statement for Wage Earners and Self-Employed Individuals. It details your financial situation.
  • Form 433-B (OIC): This is the Collection Information Statement for Businesses. Use this if you’re a business owner.

If you’re disputing the actual amount of tax you owe, use:

  • Form 656-L, Offer in Compromise (Doubt as to Liability): This replaces Form 656 and the collection information statements.

APPLICATION FEE

There is a nonrefundable $205 application fee to apply for an OIC unless you meet the Low-Income Certification Guidelines.

Remember, while going through the OIC process might seem complex, it’s better to handle it thoroughly now than face bigger tax problems later.

Explore how our IRS debt settlement services can help you navigate the OIC process smoothly. From preparing the necessary forms to negotiating with the IRS and handling an IRS bank levy, our experts are here to support you every step of the way. Contact us today to get started!

WHAT IS THE MAIN OBJECTIVE OF THE OFFER IN COMPROMISE?

The objective of the Offer in Compromise program is to determine the amount of delinquent taxes that can reasonably be collected at the earliest possible time and at the least cost to the government with the following in mind:

 

  • Achieve a resolution that is in the best interests of both the individual taxpayer and the federal government.
  • Provide the taxpayer a fresh start toward future voluntary compliance with all filing and payment requirements.
  • Secure collection of revenue dollars that may not be collected through any other means.
  • Reduce the inventory of delinquent cases.
  • Make sure the taxpayer becomes in full compliance with all future years.

The main goal of the IRS Offer in Compromise (OIC) program is to determine the amount of delinquent taxes that can be reasonably collected as quickly and cost-effectively as possible. Here’s what they aim to achieve:

  • Best Resolution: The IRS wants to find a solution that benefits both the taxpayer and the government.
  • Fresh Start: The program is designed to give taxpayers a clean slate, encouraging future voluntary compliance with all tax filing and payment requirements.
  • Revenue Collection: The IRS aims to collect money that might otherwise be uncollectible.
  • Case Reduction: By resolving cases efficiently, the IRS reduces the backlog of delinquent accounts.
  • Future Compliance: Ensuring that taxpayers comply fully with future tax obligations is a key objective.

The offers in compromise IRS program are designed to help taxpayers get back on track while ensuring the government collects as much as possible.

Don’t let IRS notices overwhelm you! Our IRS tax consultants are here to help. From getting you through an OIC process to handling an IRS Notice CP 504, we provide expert guidance for a smooth resolution. Get in touch now and take control of your tax situation today!

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COLLECTION FUNCTION OF THE INTERNAL REVENUE SERVICE

The Collection function is responsible for processing and investigating two types of Offers in Compromise:

  • All offers based on Doubt as to Collect-ability, including proposed liabilities still subject to settlement in Examination or Appeals.
  • All offers based on Effective Tax Administration. These offers are rare in number.

EXAMINATION FUNCTION OF THE INTERNAL REVENUE SERVICE

The examination function is responsible for processing and investigating offers submitted based on Doubt as to Liability.

DETERMINE YOUR ELIGIBILITY FOR AN IRS OFFER IN COMPROMISE

First, confirm your eligibility using the Offer in Compromise Pre-Qualifier Tool. If you meet the following criteria, you’re eligible to apply for an Offer in Compromise:

  • Tax Compliance: You have filed all required tax returns and made all estimated payments.
  • Bankruptcy Status: You are not currently in an open bankruptcy proceeding.
  • Current Year Compliance: You have a valid extension for the current year’s return if applying for the current year.
  • Employer Requirements: If you’re an employer, you must have made all tax deposits for the current and past two quarters before applying.

Reasons Your OIC Application Might Be Rejected

Even if you meet the eligibility criteria, there are still reasons the IRS might reject your Offer in Compromise application:

  • Court-Ordered Tax Debt: Your tax debt is part of a court order.
  • Incomplete Application: Not all the required information was included in your application.
  • Unbilled Tax Debt: You have not received a bill for a tax debt included in your offer amount.
  • Justice Department Involvement: Your case has already been sent to the Justice Department by the IRS.
  • Application Fee: Failure to pay the nonrefundable $205 application fee. This fee is waived for those with low incomes, based on your adjusted gross income (AGI) and family size as specified on Form 656, Section 1.

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UNDERSTANDING IRS OFFER IN COMPROMISE: SUSPENSION, TERMS, AND APPEALS

The IRS Offer in Compromise (OIC) process can be complex, so it’s necessary to grasp the key points to avoid any issues. Here’s a straightforward breakdown:

Suspension of Collection

When you submit an OIC, the IRS pauses their collection activities. This suspension lasts while your OIC is under review, for 30 days after a rejection, and during any appeal process. This gives you some relief, but remember, the IRS will resume collection if your offer is not accepted.

Offer Terms

If the IRS accepts your OIC, you must comply with all tax laws. They’ll keep any refunds, including interest, from tax returns filed up to the acceptance date. If you fail to meet the terms, the IRS can declare your OIC in default, and you’ll owe the original amount plus interest and penalties. For OICs based on collectability or effective tax administration, you must file all tax returns and pay taxes on time for five years from the acceptance date.

Right to Appeal

If your OIC is rejected, you’ll receive a letter explaining why. This letter also includes instructions on how to appeal. You have 30 days from the letter’s date to file your appeal with the IRS Independent Office of Appeals. Act quickly to contest the decision.

Return of an Offer

Sometimes, the IRS returns your OIC instead of rejecting it. This happens if you didn’t submit all necessary information, filed for bankruptcy, missed the application fee, or haven’t filed required tax returns or paid current tax liabilities. Unlike a rejection, you can’t appeal a returned offer. However, you can fix the issues and resubmit your offer in compromise application.

5 FACTS ABOUT OFFER IN COMPROMISE IRS SETTLEMENTS

Dealing with the IRS can be tough, especially when it comes to settling your tax debt. Here are five crucial facts about Offer in Compromise (OIC) settlements that you need to know:

 

  1. Lengthy Process: The IRS doesn’t rush. On average, it takes them 6 to 9 months to process an Offer in Compromise. Patience is key.
  2. Small Settlements: Don’t expect to get off easy. The typical settlement amount is just 14 cents on the dollar. The IRS wants to squeeze as much as they can out of you.
  3. Low Acceptance Rate: The IRS isn’t in the habit of saying “yes.” Only 38% of all OIC applications get accepted. They’re looking for any reason to say no.
  4. Public Record: If your offer is accepted, it becomes public information. Anyone can look it up, so be prepared for that level of transparency.
  5. Time-Consuming: The IRS spends a good chunk of time on each application, anywhere from 10 to 20 hours. They’re thorough and will scrutinize every detail.

WHAT IRS WILL CHECK IF YOU SUBMIT AN OFFER IN COMPROMISE (OIC)?

Submitting an Offer in Compromise (OIC) isn’t just about filling out forms. The IRS will dive deep into your financial background to make sure they’re not missing anything. Here’s what you can expect:

 

  • Full Google Search: They’ll scour the internet for any information about you.
  • Credit Reports: Your credit history will be thoroughly reviewed.
    Accurint Search Engines: They’ll use advanced search tools to dig up details.
  • License Checks: They’ll pull any professional or business licenses you hold.
  • LexisNexis: They might use this tool to gather more information.Keep in mind, that submitting an OIC automatically extends the statute of limitations for collection. This means the IRS has more time—up to 30 days after your offer is considered—to try to collect the full amount you owe.

Don’t expect leniency. The IRS will look for any reason to deny your offer. Make sure your submission is airtight to avoid giving them an easy out.

THE IRS MAY NOT HAVE THE AUTHORITY TO ACCEPT AN OFFER IN COMPROMISE WHEN:

  • Questions concerning the amount of the taxpayers liability or the collection of the liability for all or part of the periods the taxpayer owes is in litigation.
  • The federal tax liability for all or part of the periods the taxpayer owes has been reduced to a judgment. Judgment periods are different in most states so you must check on a state by state basis.
  • If an offer is received that covers tax periods for which restitution was ordered, the IRS cannot accept an OIC that in any way modifies the terms of a restitution order. The IRS may consider an OIC for periods for which restitution was ordered only if the defendant has paid or will pay the full amount of the restitution as part of the offer.
  • The IRS has a civil or criminal prosecution pending against the taxpayer in the Department of Justice or United States Attorneys Office. Acceptance by the IRS is dependent upon the Department of Justice accepting a related offer or settlement.

DISTRICT COUNSEL OFFICE

District Counsel attorneys provide opinions on OIC’s recommended for acceptance when the total liability, including additions and accrued penalty and interest, is $50,000 or greater. District Counsel Office, when requested, will provide legal opinions for matters related to investigation and processing of offers in compromise.

TAXPAYER ADVOCATE SERVICE OF THE INTERNAL REVENUE SERVICE

The Taxpayer Advocate Service is an independent organization within the IRS whose employees assist taxpayers in solving tax problems that have not been resolved through normal channels, or who are experiencing significant hardships. IRS employees who work as taxpayer advocates may request expedited processing of an Offer in Compromise if they deem such action necessary.

TAXES, PENALTIES, AND INTEREST CONSTITUTE ONE LIABILITY

An Offer in Compromise is effective for the entire assessed liability of tax, penalties, and interest for the years or periods covered by the offer. All questions of tax liability for the years or periods covered by the agreement will be settled. Neither the taxpayer nor the federal government can reopen a compromised tax year or period unless there was falsification of information or documents, concealment of ability to pay and/or assets, or a mutual mistake of a material fact which would be sufficient to set aside or reform a contract.

TAX LIABILITY THAT HAS NOT YET BEEN ASSESSED

  1. The Internal Revenue Service will not consider an offer that is solely for a tax period or tax year that has not been assessed unless the IRS computer system indicates a return has been received or an assessment is pending. A simple computer check is made to find out if this is so.
  2. Taxpayers may submit, and the internal Revenue Service must consider, an offer to compromise taxes due on tax returns which have been filed but have not yet been assessed. However, before the offer can be accepted, the taxes must be assessed.

APPLICATION FEES APPLICABLE TO OFFERS IN COMPROMISE

  1. Effective November 1, 2003, the Internal Revenue Service began charging an application fee.
  2. The application fee applies only to certain offers processed.

IRS PAYMENT PLANS FOR OFFER IN COMPROMISE (OIC)

Every year, over 6 million taxpayers set up IRS payment plans, installment agreements, or monthly payments to handle back taxes. Here’s how you can get ahead and make these plans work for you:

Setting Up an IRS Payment Plan

Complete IRS Form 433F: You need to document your financial situation using IRS Form 433F, available on our website. This form is your ticket to starting a payment plan.
Prepare for Scrutiny: The IRS will dig deep into your income and expenses, comparing them to regional standards. They’re not looking to be generous, so make sure your documentation is airtight.

State Payment Plans

If you’re in a tough financial spot, you probably owe state taxes too. State revenue departments are even less flexible than the IRS and have up to 20 years to collect taxes from you. However, setting up a state installment plan can actually help your case with the IRS:

  1. Lower Disposable Income: A state payment plan reduces your available cash flow, which can make the IRS more likely to accept your offer.
  2. Show Financial Strain: Negotiating with the state shows you’re dealing with your financial issues across the board, strengthening your IRS Offer in Compromise.

In financial trouble? Secure a state installment agreement with our offer in compromise lawyer before knocking on the IRS’s door with an Offer in Compromise. This smart move can significantly boost your chances of success.

NEW FRESH START PROGRAM BY IRS – OFFERS IN COMPROMISE (OIC)

An Offer in Compromise (OIC) is an excellent relief option for taxpayers who can’t pay their back taxes due to limited assets or income. If approved, the IRS allows you to settle your debt for a fraction of the total amount owed. Payments can be made either as a lump sum over five months or in monthly installments for 24 months. This program can provide significant financial relief and help you get back on track with your tax obligations.

 

The IRS may accept an Offer in Compromise Settlement based on three grounds.

Getting an Offer in Compromise (OIC) accepted by the IRS is no walk in the park, but understanding the specific grounds on which they might agree can significantly boost your chances. Here’s a closer look at the three main criteria:

Doubt as to Liability

This ground applies when there’s a genuine question about whether the IRS has accurately determined the amount owed. If there’s legitimate legal uncertainty about the IRS’s assessment, your offer might stand a chance. However, proving this requires solid evidence and is quite rare.

Doubt as to Collectibility

The IRS might accept an OIC if there’s doubt that the full amount owed is collectible. This means if your assets and income are clearly insufficient to cover the tax liability, the IRS may consider settling for less. They understand they can’t collect what you don’t have, but be prepared for them to scrutinize your financial situation thoroughly.

Effective Tax Administration

Even if the tax is legally owed and fully collectible, the IRS might accept an OIC if paying the full amount would cause economic hardship or be unfair due to exceptional circumstances. This is a tough ground to meet, as you must convincingly demonstrate that paying the full tax would be excessively burdensome or inequitable.

Going through the OIC process can be complex, but professional assistance can greatly improve your chances of a successful settlement.

Don’t let tax debt control your life! Our experts can help you negotiate an IRS Offer in Compromise, settle your tax debts, and provide unfiled taxes help. Take the first step towards financial freedom—contact us today!

THE TAX INCREASE PREVENTION AND RECONCILIATION ACT OF 2005

  1. On May 17, 2005 Congress passed the Tax Increase Prevention and Reconciliation Act of 2005 that was was enacted on May 17, 2006, which made major changes to the offer in compromise program. These changes become effective for all offers received by the Internal Revenue Service starting July 16, 2006.
  2. Under the new law, taxpayers submitting requests for lump sum cash offers must include with the offer a payment equal to 20% of the offer amount. The payment is treated as a payment of tax and is nonrefundable. That is, it will not be returned even if the offer is deemed to be not processable, later returned or rejected. A lump sum cash offer means any offer of payments made in five or fewer installments.
  3. Taxpayers submitting requests for periodic payment offers must include the first proposed installment payment with their application. A periodic payment offer is any offer made in six or more installments. The taxpayer is required to pay additional installments while the offer is being evaluated by the IRS. All installment payments are nonrefundable, even if the Offer is deemed not processable, later returned or rejected.
  4. Under the new law, taxpayers that qualify as low-income, based on current criteria, and submit a Form 656-A, will not have to submit the application fee.
  5. If the IRS cannot make a determination on an OIC within two years, then the offer will be deemed accepted. If a liability included in the offer amount is disputed in any court proceeding, that time period is omitted from calculating the two-year period. Once a determination letter is issued by the Offer Investigator, the 24 month time frame will be considered stopped. The 24 months does not include the time in Appeals.
  6. Offers in compromise requests are submitted using Form 656, Offer in Compromise. The form provides detailed instructions for completing an offer and includes all of the necessary financial forms. When submitting Form 656, taxpayers must include an application fee of $150, depending on the type of offer, unless they qualify for the low-income exemption or are filing a doubt-as-to-liability offer.

AMOUNT OFFERED TO THE IRS FOR THE OIC

The total amount of money offered on the Form 656, must be indicated. The amount offered may not include money already paid, expected future refunds, funds attached by levy, or anticipated benefits from capital/net operating losses.

PAYMENT TERMS

  1. Taxpayers are expected to pay the entire amount offered in as short a time as possible. Acceptable offer terms should be determined by the IRS Agent and should not be limited to the proposal of the taxpayer. The IRS will often look to expand the financial terms of the Offer.
  2. The amounts and due dates of payments must be specified.
  3. There are three (3) types of payment terms that the Service and the taxpayer may agree to:
    1. Lump Sum Cash — Payable in five or fewer installments from notice of acceptance; must be accompanied by a payment of 20% of the offered amount.
    2. Short Term Periodic Payment — Payable in six or more installments within 2 years from the IRS received date. It must be accompanied with the first proposed installment, and additional installments must be paid in accordance with the taxpayer’s proposed offer terms while the Service evaluates the offer. If an amended offer is secured, the 24-month period begins the date the offer is accepted.
    3. Deferred Periodic Payment — Payable in six or more installments 25 or more months from the IRS received date, but within the time remaining on the statutory period for collection. It must be accompanied with the first proposed installment, and additional installments must be paid in accordance with the taxpayer’s proposed offer terms while the Service evaluates the offer.
  4. A taxpayer may designate payments of pre-acceptance to a specific liability including trust fund. Once the offer has been accepted, the funds are applied in the government’s best interest and the taxpayer no longer has the right to designate payments.
  5. If an Offer in Compromise is rejected you may file another Offer In Compromise.

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STANDARD CONDITIONS

  • Taxpayers must agree to all the standard conditions of the agreement as they are printed on the Form 656.
  • Taxpayer should be aware of compliance issues, which require that tax returns are timely filed and the tax due is paid for the next 5 years.

INTEREST ON THE COMPROMISE AMOUNT

  • For all offers accepted after December 31, 1999, interest on the compromise amount is also compromised.
  • For all offers accepted before January 1, 2000, interest continues to accrue until the compromise amount is paid in full.

ACCEPTANCE RATES OF THE OFFERS IN COMPROMISE

The Offer in compromise rate of acceptance is about 25%. 11,000 Offers were accepted in 2009 by the Internal Revenue Service.

TAX PROFESSIONAL RATES OF ACCEPTANCE

While there are no figures on this, my guess is the rate of acceptance of a true professional tax resolution company is around 75%.

FINDING THE RIGHT OFFER IN COMPROMISE ATTORNEY FOR YOUR TAX DEBT

When you have tax debt and no way to pay it off, an Offer in Compromise (OIC) can provide a fresh start. However, not every offer is accepted, and even accepted offers require careful adherence to terms.

If OIC seems like your best option, plan carefully and submit a reasonable offer. Ensure all forms and documents are filled out accurately and completely to avoid delays or rejections. Keep up with current tax filings and payments, as failing to do so can jeopardize your OIC. Attach all necessary financial documents to support your case and demonstrate your inability to pay the full tax amount. Proper preparation and professional guidance can significantly enhance your chances of success.

Getting Michael Sullivan’s help can greatly improve your chances of a successful OIC application. Our expert team is ready to guide you through every step. Contact us today to take control of your tax situation!

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