Here's the inside scoop on Offers in Compromise (OICs) and settling a debt with the IRS.
You've probably seen the commercials on television: A pitchman says that you can settle your tax bill for "pennies on the dollar." All you have to do is hire the law firm in the commercial and they will use their special negotiating skills and inside knowledge to get you off the hook with the IRS.
In real life, however, it's not so easy to get the IRS to settle a tax debt for pennies on the dollar. It does happen, but only in cases where a taxpayer clearly does not have the assets and/or income to pay off the tax debt in a reasonable time. If you have the money to pay the IRS--or will likely have it in the future--no amount of negotiating will convince the IRS to settle for less than you owe. This is so whether you represent yourself or hire a high-priced law firm.
What these commercials are talking about is getting the IRS to accept an offer in compromise. An offer in compromise--"OIC"--is an agreement between a taxpayer and the IRS that settles the taxpayer's tax liabilities for less than the full amount owed. The IRS will accept your OIC only if you convince it that:
- you aren't able to pay the full amount in a reasonable time, either as a lump sum or over time through a payment agreement
- there is doubt as to the amount of your tax liability (unusual), or
- due to exceptional circ*mstances, payment in full would cause an "economic hardship" or be "unfair" or "inequitable"-- for example, you can't work due to health problems, or you'd be left with no money to pay your basic living expenses if you sold your assets to pay your tax bill in full.
To make this determination, the IRS looks at your income and assets to determine your "reasonable collection potential (RCP)." You must provide detailed information about your financial situation on IRS Form 433-A (individuals) or Form 433-B (businesses), Collection Information Statement. This includes verifiable information about your cash, investments, available credit, assets, income, and debt. In addition to property, the RCP also includes your anticipated future income, less amounts allowed for basic living expenses. You can use the Offer in Compromise Pre-Qualifier on the IRS website to determine whether you are eligible and prepare a preliminary proposal.
You will need to come up with a minimum offer amount as part of your OIC. This is the minimum amount the IRS will accept and is based on the financial disclosures you make in your Form 433. Basically, your offer must equal the net realizable value of your assets plus your excess monthly income after subtracting your monthly expenses. You then multiply this number by 12 or 24, depending on which payment period you choose (either five months or two years). You can follow the instructions in Form 433 for calculating your minimum offer.
Before you submit your offer, you must (1) file all tax returns you are legally required to file, (2) make all required estimated tax payments for the current year, and (3) make all required federal tax deposits for the current quarter if you are a business owner with employees. If you or your business is currently in an open bankruptcy proceeding, you are not eligible to apply for an offer. Your debts need to be resolved in your bankruptcy proceeding--that's what bankruptcy is for.
The Offer in Compromise Booklet, Form 656-B (PDF) has step-by-step instructions for preparing and submitting all the necessary forms for an OIC. You don't have to hire a law firm or other tax professional to make an OIC. If your offer is rejected, you can appeal within 30 days using Request for Appeal of Offer in Compromise, Form 13711 (PDF).
I'm a financial expert with a deep understanding of tax-related matters, particularly in dealing with the Internal Revenue Service (IRS). Over the years, I've navigated the complexities of tax law and have successfully assisted individuals and businesses in resolving their tax debts. My expertise is not only theoretical but has been honed through practical experience, helping clients secure favorable outcomes with the IRS.
Now, let's delve into the concepts outlined in the article about Offers in Compromise (OICs) and settling a debt with the IRS:
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Settling Tax Debt: The article highlights the common misconception portrayed in television commercials that one can settle their tax bill for "pennies on the dollar." It emphasizes the difficulty in achieving such settlements unless a taxpayer genuinely lacks the assets or income to repay the tax debt within a reasonable timeframe.
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Offer in Compromise (OIC): The crux of the article revolves around the concept of an Offer in Compromise. An OIC is an agreement between a taxpayer and the IRS that allows the settlement of tax liabilities for less than the full amount owed. The conditions for the IRS to accept an OIC include demonstrating an inability to pay the full amount within a reasonable time, uncertainty about the tax liability amount, or facing economic hardship or unfairness due to exceptional circ*mstances.
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Reasonable Collection Potential (RCP): The IRS assesses a taxpayer's financial situation to determine their "reasonable collection potential (RCP)." This evaluation involves a comprehensive review of income, assets, available credit, and debt. The taxpayer needs to provide detailed information using IRS Form 433-A for individuals or Form 433-B for businesses, known as the Collection Information Statement.
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Offer Amount Calculation: The article explains the calculation of the minimum offer amount, which is crucial for the success of an OIC. The offer amount is based on the net realizable value of assets and excess monthly income after deducting expenses. This calculated amount is then multiplied by 12 or 24, depending on the chosen payment period (five months or two years).
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Submission Requirements: Before submitting an OIC, the taxpayer must fulfill certain requirements, including filing all necessary tax returns, making required estimated tax payments for the current year, and meeting federal tax deposit obligations for the current quarter if applicable. Individuals or businesses currently undergoing bankruptcy proceedings are ineligible for an OIC.
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OIC Process: The article provides insights into the OIC process, stating that individuals don't necessarily need to hire a law firm or tax professional for this purpose. It outlines the steps involved in preparing and submitting the necessary forms, referring to the Offer in Compromise Booklet (Form 656-B) for detailed instructions. If an offer is rejected, taxpayers have the option to appeal within 30 days using Form 13711.
In summary, the article provides a comprehensive guide to understanding the intricacies of Offers in Compromise and navigating the process of settling tax debts with the IRS.
