Taxpayers who owe a significant sum of money to the Internal Revenue Service (IRS) often struggle to pay their liabilities in full. In some situations, the IRS may offer relief to these taxpayers in the form of an Offer in Compromise (OIC). This program allows qualifying taxpayers to settle their IRS tax liability for less than the full amount. However, the IRS will only grant an offer in compromise under certain conditions, and the agency also has a significant amount of discretion when making this decision.
At Damiens Law, our team of experienced tax lawyers helps our clients deal with all types of IRS matters, including offers in compromise. For more information about your options when facing a significant tax debt or other tax-related concerns, contact our tax law office at (601) 957-9672.
Who qualifies for Offer in Compromise?
Most taxpayers would like to lessen their tax burden, but the IRS will only consider an offer in compromise if one of the following conditions is met:
- Doubt as to collectability – The IRS has reason to believe that they may not be able to collect the tax burden at the present moment or in the foreseeable future.
- Doubt regarding the accuracy of the debt – The IRS may accept an OIC if there is doubt regarding whether the amount of debt has been accurately assessed.
- Effective tax administration – This principle applies when the taxpayer is able to pay the debt but doing so would create an economic hardship or another type of inequity.
The doubt as to collectability standard is the most common type of OIC and this standard is the easiest to prove. However, the overall IRS acceptance rate for OICs is relatively low, as the agency only accepted about 1 in 3 offers in compromise in 2019.
What factors does the IRS consider for Offers in Compromise?
The IRS thoroughly evaluates each offer in compromise application and considers a wide range of relevant circumstances. The taxpayer’s ability to pay, income, expenses, and asset equity will all be considered before the IRS makes a final decision. Generally speaking, the IRS will decide to accept an OIC if they determine that the amount offered in compromise is the highest amount of money they can expect to collect within a reasonable timeframe.
In addition to meeting one of the three criteria listed in the previous sections, taxpayers may only qualify for an OIC if they have filed all necessary tax returns and have made all required estimated tax payments. If the applicant has not met these conditions, the IRS will return their applications and any initial payments made with the application will be applied to the applicant’s tax bill. You can learn more about submitting a successful OIC by contacting the experienced tax attorneys at Damiens Law.
How to apply for an Offer in Compromise
The Internal Revenue Service outlines the process of applying for an offer in compromise in their Form 656 Booklet. Qualifying applicants must include the following documents with their applications:
- Form 656 – Offer in Compromise
- Form 433-A (OIC) – Collection Information Statement for Wage Earnings and Self-Employed Individuals (if applicable)
- Form 433-B (OIC) Collection Information Statement for Businesses (if applicable)
- Applicants who do not meet the low-income guidelines must pay a $205 application fee and initial offer payment.
However, the application process involves more than simply gathering, filling out, and signing the required documents. Applicants will also need to carefully calculate an appropriate offer amount and correspond with the IRS.
How to calculate an IRS Offer in Compromise
When an offer in compromise application is submitted, the IRS evaluates the applicant’s financial situation through a formula that considers several factors, which are gathered from Form 433-A. The offer in compromise formula calculates whether the applicant meets the financial criteria and the result of this calculation is known as net realizable equity (NRE). When making a decision, the IRS will primarily consider this figure and the amount that they believe the applicant can pay each month – or reasonable collection potential (RCP).
As outlined in Section 5.8.5 Financial Analysis of the Internal Revenues Manual, NRE is calculated by assessing a fair market value for each of the applicant’s assets, and then subtracting the following figures from that number:
- Quick sale value – The IRS reassesses the value of assets (typically reducing the value by around 20%) to calculate a realistic price for what the applicant would receive if they had to sell the assets quickly.
- Mortgages and bank loans – The value of any liens on mortgages or other assets will be subtracted from the quick sale value.
- Property exclusions – In some situations, certain types of property may be except in the NRE calculation.
RCP represents the value that can be realized from the applicant’s assets – including real property, bank accounts, automobiles, and other types of property. This figure also considers the expected future income of the applicant, minus the cost of basic living expenses.
The OIC evaluation process
Once the IRS has determined that an application meets the requirements, they will begin their evaluation process. OIC applicants should be aware that during this stage, several significant tax-related changes may occur:
- All non-refundable payments and fees will go towards the applicant’s current tax liability;
- Notices of federal tax liens may be filed;
- All other types of collections are temporarily suspended;
- The period for legal assessments and collections will be extended;
- The applicant must make all necessary payments related to their offer;
- Payments on current installment agreements are not required; and
- If the IRS does not make a ruling within two years of receiving the offer, it is automatically accepted.
What happens if an OIC is accepted?
Successful OIC applicants must meet all of the offer terms as outlined by the IRS in Section 7 of Form 656. Additionally, any tax refunds from the calendar year in which the offer was accepted are automatically applied to the tax debt and federal tax liens are not released until the terms of the offer have been fulfilled.
If the taxpayer fails to keep their offer in compromise in good standing, the agreement could default. This commonly happens when someone with an OIC fails to continue filing their taxes by the IRS deadline, or they fail to pay any new taxes assessed after the OIC was accepted before the tax deadline. When an OIC does default, the IRS will notify the taxpayer through the mail and give them 30 days to submit a letter explaining the reason for the default, along with any relevant financial information and other documents.
What to do when an Offer in Compromise is rejected
The IRS must provide taxpayers with a written explanation when an offer in compromise is rejected. The majority of rejected OICs are either because the offer was too low, or because the applicant has been deemed “notorious” – such as someone involved in organized crime.
When an offer is rejected for being too low, the applicant has the right to receive a copy of the report that outlines the reasons for the rejection. The applicant also has the right to review this information and submit a new offer. This can be done by writing a letter within 30 days of the rejection if the applicant’s financial situation remains largely the same, but significantly different offers will require filling out a new copy of Form 656.
Appealing a rejected Offer in Compromise
OIC applicants who believe their application was unjustly denied have the right to file a formal appeal. In addition, rejected applicants have the more informal option of contacting the individual who signed the rejection letter and attempting to convince them to reconsider their decision. To file a formal appeal, fill out IRS Form 13711, Request for Appeal of Offer in Compromise, no more than 30 days after receiving the rejection letter.
An appeal may only be considered if the following circumstances apply:
- The applicant has provided all data requested by the IRS,
- All past tax returns have been filled, and
- All tax payments for the current year are up-to-date, including quarterly estimated payments for self-employed individuals and payroll taxes for employers.
Contact an experienced tax attorney for more info on Offers in Compromise
Dealing with IRS issues like audits or large tax debts can be an extremely stressful experience. Taxpayers who are in difficult situations involving the IRS can sometimes ease their burden through offers in compromise and other arrangements with the IRS. However, navigating this process and submitting a successful OIC is not always easy. Tax lawyers exist to provide specialized legal guidance in these types of IRS matters, along with other tax-related concerns. This is why many individuals who face major tax debts, audits, and other stress-inducing IRS matters hire an attorney to represent them throughout the process and ensure that they take the appropriate steps based on their specific tax situation.
At Damiens Law, our Mississippi tax lawyers have been helping our clients resolve their tax situations for nearly 10 years. We are prepared to evaluate your unique tax situation, help you construct a plan for resolving the matter, and represent you during correspondence and meetings with the IRS.
For more information about submitting an offer in compromise or any other tax matter, contact Damiens Law today at (601) 957-9672.