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Offer In Compromise Tips
Be Weary
There are a variety of businesses in the marketplace claiming to settle your unpaid tax bill for “pennies on the dollar”. This needs to be thoroughly reviewed prior to making any decision. What will they do? How will they get you “pennies on the dollar”? Check these companies out with the local Better Business Bureau, local tax licensed tax professionals, and your Chamber of Commerce.
Even though the Offer in Compromise program does settle your unpaid tax bill for less than the original amount, there is definite protocol to be followed. It is not a quick and easy process by any means, as many of these unscrupulous firms claim.
Also be weary of anyone charging you a fee to do something that reduces your federal tax obligations.
Your best method of tackling your unpaid tax due situation is to contact the IRS for assistance. Or, a qualified and competent tax professional may be able to help you.
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Calculating Your OIC Offer
DebtHelp.com Tip: In order to request an Offer in Compromise agreement, you need to have a realistic figure in mind that fits in with your budget. Look at your total unpaid tax bill and figure out what is a reasonable and affordable amount you can pay to clear it? How do you calculate this figure?
Here are some helpful steps you can follow to arrive at your Offer in Compromise figure:
Organize documents. Gather together all your financial information that applies to your situation. For instance, you will need your titles, bank statements, mortgage notes, insurance policies, cancelled checks, and other financial-related information. You also will need any financial statements including income information (your W-2 for wages).
Disposable income. Your disposable income is defined as the amount of money you have left after paying all of your expenses. Technically, it is your gross income less any monthly living expenses. Examples of monthly living expenses include utilities, taxes, groceries, health care, mortgage payments, and secured debts. Worksheets are helpful to calculate this figure.
Net worth. This step involves knowing (and calculating) how much your net worth is. Net worth is defined as your assets valued at current fair market value less any applicable expenses. Applicable expenses would include those you incur when attempting to sell your assets (otherwise known as liquidation expenses). The use of a worksheet helps with this.
Total. The final step will be to add together the above two figures, disposable income and net worth. Project this figure out over 60 months and you will have the figure needed for a reasonable offer.
Method of payment. Finally, figure out how you will pay the amount. Will it be check, credit card, money order? Let the IRS know.
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Applying Guidelines For An Offer in Compromise
Offer in Compromise programs offer taxpayers a way to reduce their tax debt at less than the full original amount of tax debt. Sometimes this program is affectionately known as ‘pennies on the dollar’. The agreed amount in an Offer in Compromise includes the original unpaid tax bill, interest, and penalties. In order to apply for an Offer in Compromise (OIC), you need to follow some guidelines.
Form. You will need to file IRS Form 656 as a requirement.
Online. You can also go online to request an OIC.
Financial statement. You will need to supply the IRS with financial information about your situation. This is done on IRS Form 433-A for individuals. For businesses, you will use IRS Form 433-B.
Verification. You will need to supply verification of your financial situation. Verification includes bank statements, vehicle titles, mortgage notes, financing agreements, etc.
Cover letter. Write a cover letter explaining why the IRS should accept your OIC offer.
You need to convince them it is to their best interest to enter into this Offer of Comprise agreement. Enclose this letter with your IRS Form 656.
Fee. There is a $150 application fee. This is nonrefundable. Include this with your application package.
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Offer In Compromise Defined
DebtHelp.com Tip: Offer in compromise. This IRS tax resolution method has the IRS and you settling your income tax debt at less than the original amount. If you have determined that an installment payment plan would not be beneficial to you, you may apply for an Offer in Compromise. This is one of the last voluntary steps along the IRS collection process. The Offer in Compromise program is sometimes preferred over installment agreements that last years and cost the IRS money plus time.
The Offer in Compromise program compromises your total tax, interest, and penalties for an amount that considers your assets, income, and general ability to pay.
Both the IRS and you can benefit by becoming involved in an Offer in Compromise program. The IRS is collecting some unpaid taxes from you while you are paying less than the original amount owed. You can have the option of paying either in a lump sum or in installments.
This program does not come easy, though. You need to convince the IRS that entering in an Offer in Compromise agreement is the best option for them. Explain this in the cover letter you will need when applying.
Plus, the process is very time-consuming and extensive. There are definite procedures that you and the IRS need to follow in order to enter into an OIC.
Even though the IRS Offer in Compromise is a great way to reduce IRS debt, this tax resolution method is not a quick and easy fix. Sometimes Offers in Compromise can go for years. It is the most complicated and time-consuming of the methods used to collect unpaid taxes.
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IRS Case Studies in OIC
Aaron, a single attorney, owed the IRS $30,000 in income tax liabilities from the last five years.
He had $5,000 equity in his vehicle, while his miscellaneous assets totaled about $1,000. His current living expenses were more than his income.
Steve offered the IRS $6,000. The IRS declined his offer, and recommended an offer of $10,000. Steve agreed and increased his offer to that amount. It was accepted.
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Due to numerous business failings, Pam owed the IRS $500,000 in unpaid taxes.
Pam’s assets included e a fully paid Porsche, various investments totaling $8,000, and a house with a market value of $600,000 (with a $30,000 mortgage).
Pam proposed to settle for $90,000 with $45,000 paid upon acceptance and the remaining paid over five years. The IRS declined this offer. Pam then amended her OIC to $125,000 in installments with $45,000 down payment. The IRS declined again stating that Pam had the assets to fulfill her tax liability. When Pam did not satisfy her tax obligation, the IRS seized her home, sold it, along with her assets to fulfill the tax obligation.
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Uncollectible Accounts
DebtHelp.com Tip: Even though not technically known as an Offer in Compromise, you may have your unpaid tax bill classified as an “uncollectible” account. Arriving at this decision involves the IRS compromising its tax debt with you.
Technically defined, an “uncollectible” tax account is also known as an ‘undue hardship’ case. In order to qualify for this classification, you must have very little – if any- assets subject to a tax levy. You also must have no income beyond that needed to cover your living expenses.
Steps involved in obtaining the “uncollectible” tax status are as follows:
You notify the IRS you are unable to pay your unpaid tax bill. You explain why.
The IRS reviewer will prepare a Form 53. This form will temporarily inactivate any collection activities against you.
Interest and any taxes will still be owing.
The IRS will periodically re-evaluate your financial status. This usually occurs yearly.
When the IRS requests it, you will need to complete a new Financial Statement (Form 433A)
Having your unpaid tax bill classified as an “uncollectible account” is a good way to reduce IRS debt. It is not an easy process, though. Plus, the IRS will gain insight into a lot of your personal financial information.
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OIC Situations That Apply
Offers in Compromise agreements occur if you cannot afford installment agreements, which consist of the full amount of taxes due, any penalties, and any interest. Also, an OIC cannot last longer than five years.
You can only apply for an Offer in Compromise when all of the following conditions are present:
All of your required federal income tax returns have been filed
Any collection of the entire tax bill will cause you economic harm
Doubt exists as to whether you can pay your entire tax bill amount
Doubt exists that the assessed tax amount is correct
You are not in bankruptcy at the time of applying for an OIC
You can eliminate, spread out, or decrease your tax debt by filing for bankruptcy
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Offer In Compromise Procedures
If you have an Offer in Compromise (OIC) under investigation (being reviewed or pending) by the IRS, they may still be able to file a Notice of Federal Tax Lien claim against you. The applicable Statue of Limitations regarding your federal tax lien is extended, in other words.
The pending period involving your OIC starts when an IRS employee determines that your IRS Form 656 is ready for processing.
The pending period will continue until there is a final determination by the IRS
as to whether it rejects, accepts, or acknowledges withdrawal of the offer in writing.
If you find out that your Offer in Compromise has not been accepted by the IRS, you may appeal the decision. At this point, your Offer in Compromise will be treated as pending.
The pending status is only removed when a final decision has been made by the IRS.
