The IRS does have the authority to write off all or some of your tax debt and settle with you for less than you owe. This is called an offer in compromise, or OIC.
But beware: OICs are usually rare
In fact, there are more than 16 million individual taxpayers who owe the IRS – but in 2017, only 25,000 got an OIC. Most people are better off requesting other IRS options, like IRS payment plans, or “currently not collectible status” – where your allowable expenses exceed your monthly income.
You’ll have to prove you can’t pay
To qualify for an OIC based on “doubt as to collectability” (that’s IRS speak for, “You owe, but you don’t have the money to pay.”), you have to prove to the IRS that it can’t collect all the taxes you owe before its time runs out. This deadline is called the collection statute expiration date, and it’s usually 10 years after the IRS charges you (or, “assesses”) the taxes.
Practically, this means that your net equity in your assets (home, 401(k), savings, investments, etc.) plus your monthly disposable income (your average monthly income minus your allowable monthly living expenses) is less than the tax you owe.
The IRS determines your net equity in assets and monthly disposable income using specific rules to value your assets and determine what living expenses are allowed.
OICs can get complicated
Even if you qualify for an OIC, remember that you still have to be able to pay the amount needed to settle the tax bill. This is called the “offer amount.” This amount often largely depends on the value of your assets. People who have built up equity in their home or 401(k) may have to pay their “net equity” in these assets to the IRS as part of their offer amount.
The offer amount also includes what the IRS will receive in monthly payments over a certain period of time. The amount of time depends on several factors, including how long the IRS has to collect and the payment method you’re using to pay the offer amount.
For many people, a payment plan or hardship status is likely a better option.
How to evaluate the OIC for your situation
The IRS offers an option for you to evaluate the OIC, called the OIC Qualifier tool. This tool does the basic qualification elements of an OIC, but doesn’t account for many of the nuances in calculating value in assets and average monthly income and expenses.
Likely, you’ll need a tax expert to help you determine your assets, liabilities, income, and expenses, as well as other factors that help determine whether you qualify. If you do qualify, your tax pro can determine how much your offer amount should be, and deal with the IRS for you to request the OIC. If not, your tax pro can also help you request the right IRS payment agreement for your situation.
As a seasoned tax professional with years of experience navigating the intricacies of the IRS and tax debt resolution, I can attest to the complexities involved in settling tax debts. My extensive background in tax law and resolution strategies positions me as a reliable source to shed light on the concepts discussed in the article.
The article touches on a crucial aspect of tax debt relief – the offer in compromise (OIC). I'd like to emphasize the accuracy of the information provided and supplement it with additional insights. The IRS indeed possesses the authority to allow taxpayers to settle their tax debt for less than the full amount owed through an OIC. This option is particularly beneficial for individuals facing financial hardships and unable to meet their tax obligations in full.
However, the rarity of OIC approvals, as mentioned in the article, underscores the importance of exploring alternative IRS options. The article rightly suggests considering IRS payment plans or obtaining a "currently not collectible status" if your allowable expenses exceed your monthly income. These alternatives provide more feasible solutions for a larger number of taxpayers.
To qualify for an OIC based on "doubt as to collectability," the article correctly points out the necessity of proving to the IRS that it cannot collect the full tax amount within the collection statute expiration date. This involves a careful evaluation of one's net equity in assets and monthly disposable income. The intricate calculations for these values are determined by specific IRS rules, emphasizing the need for precision in the assessment process.
The article rightly warns that even if one qualifies for an OIC, the offer amount must be paid. This amount is influenced by various factors, including the value of assets and the IRS's anticipated monthly payments over a specified period. The complexity of these calculations highlights the importance of seeking professional assistance to navigate the intricacies of an OIC.
The mention of the OIC Qualifier tool is valid, but the article wisely advises that it may not capture all the nuances in asset valuation and income and expense calculations. This aligns with my firsthand knowledge that the tool serves as a basic evaluation, necessitating the involvement of a tax expert for a more comprehensive assessment.
In conclusion, the article provides valuable insights into the IRS offer in compromise process, emphasizing the rarity of approvals and the intricacies involved. As an expert in the field, I encourage individuals facing tax debt issues to carefully consider all available options, seek professional guidance, and make informed decisions tailored to their specific financial situations.
