Offer In Compromise Tips
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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
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.
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.
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.
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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