Offer in Compromise
What is an Offer in Compromise?
The government, like any other creditor, encounters situations where an account receivable cannot be collected in full or there is a legitimate dispute as to what is owed. It is an accepted business practice to resolve these issues through negotiation and compromise.
The IRS handles these types of cases through a process called Offer in Compromise. This is “Pennies on the Dollar” approach you have probably seen advertised on the TV or heard on the radio.
An offer in compromise (OIC) is an agreement between a taxpayer and the Internal Revenue Service that settles the taxpayer's tax liabilities for less than the full amount owed. If the liabilities can be fully paid through an installment agreement or other means, the taxpayer will in most cases not be eligible for an OIC.
What is an Offer in Compromise for?
An offer in compromise allows you to settle your tax debt for less than the full amount you owe. As such, it may be a viable option if you can't pay your full tax liability, or doing so would create a financial hardship.
The IRS considers the following when reviewing your Offer in Compromise:
According to IRS policy, Policy Statement P-5-100 states:
The IRS will accept an offer in compromise when it is unlikely that the tax liability can be collected in full and the amount offered reasonably reflects collection potential. An OIC is a legitimate alternative to declaring a case currently not collectible or to a protracted installment agreement. The goal is to achieve collection of what is potentially collectible at the earliest possible time and at the least cost to the Government.
In most cases, the IRS will not accept an offer unless the amount offered by the taxpayer is equal to or greater than the reasonable collection potential (the RCP). The RCP is how the IRS measures the taxpayer's ability to pay. The RCP includes the value that can be realized from the taxpayer's assets, such as real property, automobiles, bank accounts, and other property. In addition to property, the RCP also includes anticipated future income, less certain amounts allowed for basic living expenses.How do I know if I qualify for an Offer in
The important thing to understand about the Offer in Compromise or OIC is that very few taxpayers actually do qualify.
To qualify for an OIC, you have to be able to prove one the following 3 things to the IRS:
1. You can not possibly afford to pay the tax debt in full – even if you get a smaller house and live off of beans and rice
2. There has been a serious mistake and you don’t actually owe the tax debt in question
3. Taking all things into consideration, it would somehow be unjust or unfair for you to have to pay the tax debt
The word prove is key here; to prove your financial situation, you will need to fill out and submit a form 433-A to the IRS. We like to call this form the “Treasure Map” because on the form 433-A, you will have to detail out absolutely all of you financial information including; bank account balances, bank account numbers, all of your income, the sources of your income, available credit, assets, etc. Essentially, it is a very detailed listing of everything you own, or can get your hands on.
4 good reasons to speak with a tax professional before submitting a 433-A to the IRS:
1. Accuracy – Any inaccuracies or misrepresentations on this form could amount to perjury. A tax professional will be able to mitigate the possibilities of errors before the form is submitted to the IRS.
2. Options – Once submitted, things are in motion that can not be easily undone. If the IRS rejects your settlement offer, they have the right to immediately start taking assets (see also tax lien, tax levy, and wage garnishment). By working with a tax professional, you will greatly increase the likelihood that your Offer in Compromise will be approved, or at least know in advance that you are not a good candidate and to explore other options. Keep in mind, the IRS rejects over 70% of all Offer in Compromise settlements submitted.
2. Time – The IRS only has a limited period of time to collect on a tax debt (see statute of limitations). A typical Offer in Compromise can take between 9 months and 2 years to receive an approval or rejection from the IRS. That time period is added onto the amount of time the IRS has to collect on your tax debt.
2. Money – Although there is no set price a tax resolution firm charges to prepare and negotiate an Offer in Compromise, it is fair to say $4,000 is a good estimate. This is a lot of money to invest in something that is not a sure thing. Remember the “Pennies on the Dollar”? When a company promises you that you will pay pennies on the dollar, they don’t say how many pennies – it could be 99 pennies on the dollar!
Keeping in mind that the IRS rejects over 70% of all Offer in Compromise, you owe it to yourself to speak with a tax professional first to see if you are even a good candidate. There are several options available to us to help you, and we will be happy to discuss them all with you.
If you are currently faced with an IRS Audit, or owe the IRS back taxes, you should think very strongly about consulting with a tax professional today. To speak directly with a tax advisor at our firm, call us at (888) 918-8121. The call is free, the consultation is free, and you are under no obligation to hire us.