Carrying long-term debt is a challenge, but when the money is owed to the government and you see no way to pay what you owe, it can be psychologically and emotionally debilitating. Some people think they can turn to bankruptcy, but that is not the case – bankruptcy specifically will not discharge tax debts. One of the few options available for settling tax debt is an IRS program called an Offer in Compromise, or OIC.
An OIC is not something that the IRS agrees to lightly. Roughly one in three applications for the program are approved. Still, it may be worth your time and effort to determine whether you qualify.
The Three Steps to Applying for an Offer in Compromise
- Fill out IRS form 433-A and IRS form 656. If you plan to appeal the debt itself, you will also need to fill out IRS form 656-L.
- Pay the nonrefundable application fee of $205. If your income is below the IRS low-income guidelines, the fee may be waived.
- Propose paying an alternative amount to the IRS
This is a simple summary of a complex process that requires providing a significant amount of detail about your income and expenses. Though the form asks for a lot of information, the more diligent you are in demonstrating your inability to pay both your bills and your tax debt, the better your chances of being approved. It is also notable that 20% of the amount that you are offering to pay within your application must be included with your application in order for it to be considered. If your Offer in Compromise is rejected, the money will be applied toward your debt.
Eligibility for Applying for an OIC
Qualifying for an OIC is difficult in large part because the IRS has such strict rules about who is eligible to apply, as well as regarding what is needed to qualify.
Let’s look at the question of whether you can apply first. In order for your application to be accepted, you must make sure that you meet the following criteria:
- You have answered all questions on the forms
- You are current in having filed your tax returns
- You must have submitted the $205 application fee or successfully had it waived
- There must be at least one tax debt in your Offer in Compromise for which you have not received a bill
- You must have submitted all of your estimated tax payments for the current year
- You must not be in the midst of a bankruptcy proceeding
- You must continue paying taxes and filing your tax returns while the IRS response to your offer is pending
- Your case cannot have been sent to the Justice Department by the IRS
If any of these items are not in evidence, the IRS will send your application back for correction and resubmission.
Qualifying for an Offer in Compromise
The decision-making process that the IRS uses when considering taxpayers’ Offers in Compromise is an objective calculation, based on the financial information that’s been submitted to them, about whether and how much payment they are likely to be able to recover – a number referred to as “Reasonable Collection Potential.” That financial information considered includes all of your assets, your income, and your earnings potential as well as your cost of living and your debts. The IRS is extremely granular in their analysis, working to determine whether the amount of payment that you have suggested in your Offer in Compromise is less than, equal to, or greater than the Reasonable Collection Potential.
When the IRS accepts an Offer in Compromise, it is generally because they agree that your circumstances make it a hardship for you to pay, because there is a question about the actual amount that you owe, or because they believe that they’re never going to be able to collect the amount that you owe in full.
What the IRS Offer May Look Like
If the IRS decides to grant your request for an Offer in Compromise, they will do so in one of two ways. You will either be able to pay your debt off within five months or under a 24-month payment plan.
It is important to remember that under either of these plans, the IRS will already have received 20% of your offer amount and it will be considered the first payment under either of these payment options.
What Happens While You’re Waiting for the IRS to Respond
Upon receipt of your Offer in Compromise and all supporting documentation, all IRS collection activities will cease. If there are tax liens in place they will remain in place pending a decision and until you have made all payments if your offer is accepted. You will continue receiving any tax refunds that you are owed unless it is received via an amended return after an Offer in Compromise has been activated.
If your tax refund has been garnished and you are waiting for an IRS response to your Offer in Compromise proposal, you can request an offset bypass refund based on economic hardship that you will have to prove.
Rejection of your Offer in Compromise is appealable, and there are other options available — including installment plans or a “currently not collectible” status that can help you relieve extreme financial stress.
If you are struggling with tax debt that you believe you will simply be unable to pay, an Offer in Compromise may be the answer. For help identifying the best option available for your specific circumstances, contact us today to set up a time to meet.
If you have any questions, please contact our office at (503) 224-5321. Isler Northwest LLC is a firm of business advisors and CPAs in Portland, Oregon. Our service goal at Isler Northwest is to earn our clients’ trust as their primary business and financial advisor.
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