IRS Offers in Compromise
The Offer in Compromise is probably the most commonly known tax resolution strategy. This is what you hear about in TV commercials and radio ads, particularly when they talk about settling your tax debt for “pennies on the dollar”. The Offer in Compromise (OIC) can be the most effective way to dispose of a burdensome IRS debt. The IRS offers this program to taxpayers who can show that they do not have the resources to repay the debt. Successful OICs can result in settlements for as little as 1% of the debt. While the OIC program is extremely popular, the odds of a successful outcome are stacked against you. Overall, less than two offers out of 10 are accepted by the IRS. Working with Prodigy can change the odds in your favor. Contact Us Today to see if you Qualify for an Offer In Compromise with the IRS. Our team has successfully submitted hundreds of Offer In Compromises that have been accepted by the IRS. Our success can be attributed to our knowledge of the program and our ability to successfully assess whether you will qualify. In fact, by the end of your free consultation, we will tell you whether you are a candidate for an OIC. Contact Us Today.
It is important to keep in mind that not everybody even qualifies for an Offer in Compromise, not to mention that this is only one of the many options that might be available to you. Each option must be explored in relation to the specific facts and circumstances surrounding your tax problem and then the best option can be selected and implemented.
In some instances it may be necessary to employ two or more options to resolve your tax obligations. Keep in mind that the ultimate goal is to solve your tax problem permanently and for the lowest amount allowed by law. We specialize in Reducing and Resolving Back Tax Issues. Contact Us Today to get your own Personalized Tax Resolution Plan.
The IRS Offer in Compromise program allows you to pay the IRS less than the full amount of your tax, penalties, and interest, and pay only a small amount as a full and final settlement. This program also has an option for Doubt as to Liability. In these cases you disagree with the amount of the tax assessment and this gives you a chance to file an Offer in Compromise and have your tax assessment itself reconsidered.
The Offer in Compromise program allows taxpayers to get a fresh start. In this process, all back tax liabilities are settled with the amount of the Offer in Compromise. Once the payment amount of the Offer in Compromise is fully paid off, all Federal tax liens are released. An Offer in Compromise filed based on your inability to pay the IRS looks at your current financial position, considers your ability to pay (income minus expenses), as well as your equity in assets. Based on these factors, an offer amount is determined. You can compromise all types of IRS taxes, penalties, and interest in one fell swoop. Even payroll taxes, which are often the most difficult to resolve, can be compromised. If you qualify for the Offer in Compromise program, you may be able to save thousands and thousands of dollars in tax, penalty, and interest.
Full Financial Disclosure
An Offer in Compromise application will require complete financial disclosure. In other words, a full and accurate Form 433-A or Form 433-B will be required, along with complete supporting documentation. Form 433 is the IRS financial statement. Because the government is going to accept less money for the tax debt than what you owe, they are going to go to great lengths to make sure that you actually qualify. Think of it as applying for a mortgage – you’re going to need to submit much of the same paperwork.
You should note that almost 80% of all Offers in Compromise are ultimately rejected by the IRS, either via the Offer process itself, or in Appeals. The biggest reason that Offers are rejected is because the applicant simply wasn’t eligible for the program. Many other Offers in Compromise are rejected because the taxpayer did not fill out a complete Form 433 and provide copies of ALL supporting documentation.
Some taxpayers file an OIC simply to “buy time” to figure something else out, since the process normally takes 6 to 9 months for an Offer application to be processed and denied, including Appeals. While this may be a worthwhile strategy for you, you should note the statute of limitations on the IRS being able to collect your tax debt is extended day-for-day while your Offer is in process, and for 30 days after it is ultimately denied.
Do I Qualify to settle with the IRS
Your eligibility to settle for less than what you owe is directly related to your offer amount (see “How Much Do I Offer”). If your offer amount is equal to or greater than the minimum amount calculated using the IRS formula, then you may be eligible to file an Offer in Compromise.
Like other resolution options, the IRS also requires that you:
Have filed all missing and past due tax returns
Are not currently generating new tax liabilities
Are Current with any Estimated Tax Requirements
Properly file and pay on all tax returns, on time, for the next 5 years
Let the IRS keep any tax refunds you would be due during the time you are paying on the OIC
Basically the mission of the Program is to help you be a better “Tax Paying” American Citizen. Failure to abide by these rules will either result in rejection of your offer, or default of your offer agreement and reinstatement of any tax liabilities that were eliminated.
In addition to a $186 application fee, you are required to make payments on the Offer in Compromise unless you meet low income qualification guidelines for an exception to this rule. Many Offers in Compromise are rejected for no other reason than that the application fee or first payment was not included.
The first payment option, Lump Sum Cash Offer, is used when you will pay the entire amount of your settlement offer in five payments or less. If you use this option, you may pay the entire offer amount when submitting your application, or include a minimum 20% deposit (non-refundable!) and take up to a maximum of FIVE more payments to pay off your offer. Using this payment option provides the benefit of not being required to make regular payments on your Offer while it is being processed. Using this option also generally results in paying the smallest possible Offer amount. Your five future payments need not be monthly – the entire Offer amount must simply be paid within 24 months of your Offer being accepted.
The second payment option, Periodic Payment Offer, requires you to make regular monthly payments on your Offer in Compromise while the IRS is considering it. These payments are non-refundable, and the first payment needs to be included with your offer application. You are still only given 24 months to fully pay your Offer amount, must submit the first payment with your application, and continue to pay monthly during the evaluation phase.
Regardless of the payment option you use, your payments must add up to the total offer amount, and your offer amount must be at least your Reasonable Collection Potential (RCP), discussed next.
Keep in mind that penalties and interest continue to build on your tax liability while you make Offer payments, even though ultimately those penalties and interest go away when the Offer is paid off and settled. If you default on your OIC, however, those built up penalties and interested are added back on to your balance and you will be liable for it.
How Much do I offer the IRS?
Many unlicensed tax resolution salespeople, either through ignorance or simply in an effort to “make the sale” no matter what, will tell everybody that they talk to that they qualify for an OIC, and that the Offer amount is some percentage of what they owe.
In addition to this horrifically unethical (and illegal) practice, many tax resolution firms will also only tout their most successful OIC applications, showing you that they did indeed get 1.2 cents on the dollar for one client, and 4 cents on the dollar for another client, all while failing to inform you that:
a). Most of their OIC applications for clients were outright rejected, and
b). of those that were accepted, it was usually only for 50 or 75 cents on the dollar.
Aside from the painstaking attention to detail and organization that goes into properly submitting a request for settlement due to the Doubt as to Collectability, The Offer amount is the single most important part of a successful OIC application. Calculating the OIC offer amount is extremely formulaic, and requires a complete and accurate Form 433 to be filled out. The IRS goes through an extensive investigation phase to verify information on your Form 433, looking for other assets you own and income you failed to disclose. The IRS looks at various public records sources, and may even pull a credit report to verify what you’ve told them (this action doesn’t require your direct authorization to the IRS under Federal law).
The entire purpose of these calculations is to arrive at what the IRS calls your “Reasonable Collection Potential”, or RCP. The RCP is the sum of the net worth of your assets plus all of your disposable income over the remaining time on each assessment spread out over the Collection Statute Expiration Dates. In other words:
Settlement Amount = (monthly disposable income x a number of months) + (the net realizable equity in the taxpayer’s assets)
Disposable income is monthly income minus allowable monthly expenses. It is important to recognize that the IRS will not allow all expenses that you may actually have. Common disallowed expenses are college tuition payments for a dependent and credit card payments. Under the Fresh Start Initiative announced in March 2012, the IRS will now allow you to claim student loan payments, minimum credit card payments, and a few other expenses that were previously disallowed.
The number of months over which disposable income must be calculated into the offer amount is based on the smaller of the number of months remaining until the Collection Statute Expiration Date (CSED) for the tax debt OR either 12 or 24 months, depending on the payment option for the OIC which the applicant is selecting. The monthly multiplier used to be 48 or 60, but the Fresh Start Initiative dropped this number to 12 or 24. Thus, to calculate your RCP, you must multiply your disposable income by 12 if you are paying your Offer within 5 months of acceptance, or by 24 for longer than five months.
“Net realizable equity in assets” is the quick sale value of the asset (often 80% of Fair Market Value (FMV)) minus any liabilities which are secured by the asset (e.g., a loan). As an example, if a taxpayer has a home worth $100,000 and owes $50,000 on the home, the IRS will calculate the net realizable equity in the asset as follows: ($100,000 x .80) – $50,000 = $30,000. The IRS expects, in this example, that the $30,000 will be included in the Offer amount.
Based on this explanation of how RCP is determined, and understanding that RCP is your minimum offer amount, I hope it is apparent as to why the IRS rejects so many OIC applications. In reality, the best OIC candidates are folks that have very little in the way of assets, and no disposable income. This situation is complex. You have the Right to be Represented. Hire an experienced Enrolled Agent – America’s Tax Professionals.
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