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Offer in Compromise - IRS Settlement - Tax Settlement

Updated: Aug 24


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Offer in Compromise IRS - The Fundamentals of the IRS OIC Program

“Settle Your Back Taxes for a Fraction of What You Owe - Tax Evaluation Waiting! Stop IRS Collections Now.”

--Google search ad results, September 2018 What’s true about a typical Google ad is that the IRS has a tax settlement program that allows taxpayers to settle their tax debt for less than the amount they owe. The formal name for this tax settlement program is the IRS Offer in Compromise.

That brings us to what’s false.

Despite ads that imply an OIC (#OfferinCompromise) is a common and reasonable solution for many people, the reality is that not everyone will qualify for an IRS settlement. In fact, while more than 16 million people and 3 million businesses owe the IRS, only 42% of the 80,000 oic submissions will be settled.

The reason is simple: From the IRS point of view most taxpayers can afford to pay their taxes with their current assets unless proven otherwise. It will need to be proven that an Installment Agreement isn't a suitable resolution.

The IRS OIC program is geared toward a narrow segment of taxpayers. These are people who will never be able to pay all of the debt with their future income or assets before the IRS runs out of time to collect it (generally, 10 years from the date the tax was assessed).

Next year, it will be more important than ever for taxpayers to understand their IRS payment options. In 2019, the IRS projects that 3 to 4 million new taxpayers (on top of the 30 million who already file with a balance due) will owe taxes due to tax reform and a growing gig economy. These basics will help taxpayers choose the right option with the IRS.

1. Most people file for a certain kind of IRS OIC.

There are actually three types of Offer in Compromise submissions. The most common one is called “Offer in Compromise, Doubt as to Collectibility,” or OIC-DATC. This IRS settlement is appropriate for people who can’t pay their taxes and want to settle for a payment that is less than the amount they owe.

For OIC-DATC, taxpayers will need to:

— File a Form 656,Offer in Compromise.

— Attach financial statements (Form 433A-OIC for individuals and Form 433B-OIC for businesses).

— Submit supporting documentation to prove their asset values, liabilities, and monthly income and living expenses.

The two other types of OICs are:

— “Doubt as to Liability,” when taxpayers don’t think they owe the tax in question.

— “Effective Tax Administration,” which is reserved for taxpayers who can pay the tax they owe, but it would cause undue hardship, or there are other extenuating circumstances.

Taxpayers file few of the last two types of OICs. Most people simply owe and can’t pay — so they need a Doubt as to Collectibility OIC. TOP OFFER IN COMPROMISE TIP: The IRS wants to do 2 things. One is to collect money. The other is to close a case. An Offer in Compromise accomplishes both of these IRS goals. Even if the taxpayer pays only $100, this counts as a collection and it will close the case. This will help IRS statistics. 2. All Tax Returns Need to be Filed. The IRS will accept an OIC only if taxpayers are in filing compliance, meaning they’ve filed all required past returns. How far back? In most cases, the IRS requires the past six years (this little-known rule comes from IRS Policy Statement 5-133).

If taxpayers have lots of past debts and unfiled returns, it’s a good idea to file any past returns and wrap all past tax debts into an OIC.

3. Withholding and/or estimated tax payments need to be current. Notice a pattern? This is called payment compliance.

When taxpayers file an OIC, they must prove to the IRS that they have enough withholding or estimated tax payments so that they won’t owe when they file the next year’s return. Without payment compliance, the IRS will reject the OIC. 4. It might be better to contest the taxes and penalties owed. Before considering an application to settle taxes, taxpayers should analyze their past returns and balances owed to potentially reduce the amount they owe. This is where a good tax professional can help. If the taxpayer doesn't qualify for an OIC, they can also request penalty abatement if their circumstances fit.

5. It's math, not negotiation. The formula is simple: Can taxpayers pay the taxes they owe with their net equity in assets, plus any future disposable income (that could be paid monthly) before the collection statute of limitations expires? The IRS calls this “reasonable collection potential (RCP).”

Here’s a simple example to illustrate:

— A taxpayer owes $25,000 on April 15, 2018, for a timely filed 2013 return (filed April 15, 2014) and submits an OIC application on that date.

— The taxpayer has net equity in assets of $1,000 and monthly disposable income of $200.

— The collection statute expiration date is April 15, 2024 (six years, or 72 months, remain on the collection statute).

Over 72 months, that $200 adds up to $14,400; add the $1,000 in net equity and you get a RCP of $15,400 – almost $10,000 less than the tax owed. This taxpayer would qualify. 6. Taxpayers have to be able to actually pay the offer amount. If taxpayers qualify for a DATC-OIC, the IRS will settle the amount owed based on the OIC payment method:

— The lump sum payment method requires taxpayers to offer the IRS their net equity in assets, plus 12 months of their future monthly disposable income.

— The periodic payment option requires taxpayers to offer the same net equity in assets, but include 24 months of their future monthly disposable income.

For people with substantial monthly disposable income, the lump sum option can be much more beneficial if they can meet the IRS payment terms. From the qualification example above, the lump sum payment option would be just $3,400 — $1,000 in assets, plus 12 months’ worth of available monthly income of $200.

If the taxpayer has correctly accounted for asset values and necessary income and expenses, they can settle the taxes for $3,400 using the lump sum payment option. The taxpayer would be relieved of the remaining $21,600 ($25,000 less the $3,400 paid as the offer amount) in taxes, penalties, and interest owed. 7. Taxpayers can’t file and owe for the next five years. For some taxpayers, this is a big obstacle to getting the benefit of an OIC.

If they owe taxes in the next five years, the OIC will be canceled. That means the taxpayer would owe the entire amount of taxes, penalties, and interest again. Taxpayers who can’t withhold enough or make required estimated tax payments often have their OICs canceled when they can’t meet future tax obligations. This also happens with business owners who can’t make their estimated tax payments each quarter.

In other words, you need to be good for five (5) straight years and then you're home free.

8. The OIC application can come with a significant fee and down payment. The fee to file a DATC-OIC is $186. Also, depending on the OIC payment method, taxpayers will have to start paying the offer amount with their OIC application — and maybe while the IRS is investigating and making a determination on the OIC.

— Lump sum payment OICs require a 20 percent down payment of the offer amount with the application. In our example above, unless the taxpayer met the low-income guidelines, the initial out-of-pocket costs would be $866 ($186 application fee, plus 20 percent of the offer amount, or $680).

— Periodic payment OICs require taxpayers to make 24 installment payments of the offer amount while the IRS is investigating the OIC.

— Low-income OIC applicants can avoid the fee and the down payments/installment payments of the offer amount while the IRS investigates the application.

However, if the IRS rejects the OIC, the IRS keeps the fee and the down payments/installments, and puts them toward your tax debt. Taxpayers should understand the financial costs of applying for an OIC. They could suffer significant financial hardship if they pay these upfront amounts and the IRS doesn’t accept their OIC. This is a real risk: In 2017, only 42 percent of IRS OIC applications were accepted. The tax professionals at Flat Fee Tax Relief have a 96% Offer in Compromise rate of success.

9. Taxpayers must prove they qualify for the OIC. In all DATC-OICs, taxpayers must prove their ability to pay (the reasonable collection potential). They’ll have to prove everything: asset values, debts owed on assets, monthly income, and necessary living expenses.

Unpaid bills are not allowed. Unnecessary expenses, such as payments for recreational assets and charitable contributions, are not allowed. It’s critical to get these values and amounts correct to determine whether taxpayers qualify, and determine the proper offer amount.

The IRS often disputes these amounts and can disqualify an OIC or ask for a higher offer amount. If taxpayers can’t pay the higher offer amount to settle, the IRS rejects their OIC.

USE AN EXPERIENCED TAX PROFESSIONAL FOR YOUR OFFER IN COMPROMISE FOR BEST RESULTS. 11. The IRS will investigate taxpayers’ finances. OIC investigations can last up to two years. Most OIC investigations (about 80 percent) conclude within 10 to 12 months after taxpayers apply. By law, OIC investigations never last more than two years. The first five (5) months of the Offer in Compromise will have the IRS examining the application for paperwork issues. The IRS will look to find any reason to reject the Offer in Compromise. If your paperwork is found to have an error, they will return the OIC to the taxpayer as "unprocessible." The IRS will not tell you why it was rejected. All the more reason to have an experienced tax professional on your side.

A special OIC examiner at the IRS reviews taxpayers’ filing and payment compliance, and all of the components that go into the qualification and offer amount. The OIC examiner goes in-depth into the taxpayer’s financial history, even looking into old transactions to see whether the taxpayer has tried to hide assets. If the taxpayer owes more than $100,000, it’s common for the examiner to pull a credit report. If the taxpayer has a business, examiners will commonly ask local IRS collection personnel to review the case.

This article should give you a general view of the Offer in Compromise program. For more information, call Flat Fee Tax Relief.

The tax professionals at Flat Fee Tax Relief provide valuable IRS tax debt help at a very affordable fee. Our teams are located in Clearwater, FL, and San Diego, CA. This gives our tax professionals the ability to provide nationwide coverage.



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