Settling an entire tax debt for an amount that is less than full value should interest any taxpayer.
In a program known as Offer in Compromise (OIC), the IRS will accept less than the amount a taxpayer owes on a tax bill.
The taxpayer does not have a right to have a tax due amount reduced; the IRS has full discretion. However, the IRS must consider a properly presented OIC.
For many years the acceptance levels of OIC offer amounts were low. Acceptance levels in recent years have risen as high as 40%.
Long Island New York Offer In Compromise
As our name implies, most Long Island Tax Resolution Services clients live in either Long Island or the New York City metropolitan area. Therefore, the Offer In Compromise cases which we handle are either IRS or New York State Department of Taxation oriented. We are experts in the forms, procedures, requirements and calculations of both.
Long Island Tax Resolution Services manages IRS and New York State Offer In Compromise cases extensively. This distinguishes us from the tax resolution firms who have a national business model. These national firms simply do not have the same experience in New York State specific Offer In Compromise as Long Island Tax Resolution Services does. An important part of this experience is knowing how a New York State case integrates with an IRS case.
The Three Offer in Compromise (OIC) Programs
Clearly any taxpayer would like to have their tax bill reduced. A taxpayer can present an OIC under one of the following programs:
- If doubt exists as to the taxpayer’s ablility to pay back the tax debt. The IRS calls this “doubt as to IRS to collectability”.
- “Doubt as to liability” exists when the IRS has assessed the tax wrongly. This is the least common alternative and hard to prove.
- Because of exceptional circumstances, payment of the tax bill would cause an “economic hardship” or would be “unfair” or “inequitable.” This is the effective tax administration (ETA) exception to the OIC guidelines. Here, the OIC offer amount is greater than the taxpayer’s ability to pay. The taxpayer should still consider presenting an OIC. Some examples of special circumstances are:
- People with psychological difficulties or disabilities.
- People with a bleak financial future and older. People close to and over the 60 years old is an influence.
- People with HIV or drug and/or alcohol related problems.
- People whose financial outlook is impacted by a family member’s problem.
The taxpayer should explain any special circumstances to the IRS in a summary letter. The taxpayer should present supporting doctors’ statements and medical records as well. Often the taxpayer needs to further explain the presented medical information in their letter.
The Offer in Compromise (OIC) Submission Process
Many taxpayers believe that they can call the IRS and say “Let’s make a deal”. The process is much more formal. Here are some of the steps involved:
- Provide detailed financial information on the Collection Information Statement.
Form 433-A Offer In Compromise (OIC) is for individuals and Form 433-B Offer In Compromise (OIC) is for businesses.
- Married taxpayers, who have tax debt in their name alone, must still include at least some of the spouse’s financial data.
The IRS closely examines the financial disclosures made when considering an OIC.
- Complete IRS Offer in Compromise Form 656.
- There is a $186,- application fee for filing an OIC, which the taxpayer must attach to Form 656. The taxpayer might be free from the fee if their monthly income is below the poverty guidelines.
- The taxpayer also needs to present significant amounts of financial documentation. These include pay stubs, bank records, real estate appraisals, mortgage statements, auto leases and many other items.
Final Offer in Compromise (OIC) Offer Amount Formula
A formula calculation of the information provided on the 433 form determines the minimum offer amount. The IRS tries to assess the taxpayer’s “reasonable collection potential”.
The three necessary steps to arrive at the final offer amount are:
- Decide “net realizable value” of all eligible assets
- Decide net monthly income by subtracting monthly expenses from gross monthly income.
- Decide the total offer amount by first adding together the two amounts in steps 1 and 2. Then multiply this result by either 12 or 24. The 12 or 24 number is selected based on whether the taxpayer intends to pay the offer amount in 5 months or 24 months.
Some Reasons for Offer In Compromise (OIC) Rejection
The IRS requires the following for an OIC to be accepted:
- All requested data be submitted
- All prior year tax returns be filed
- All current year taxes be paid. Self-employed people must pay all current year estimated tax payments.
When the IRS rejects an OIC, they issue a letter explaining why the offer was denied.
Some common reasons for rejection are:
- Taxpayer’s offer amount was too low. The IRS letter will state an acceptable payment.
- Taxpayer failed to prove financial hardship.
- Taxpayer is guilty of a crime.
The IRS code allows the taxpayer to ask for the working papers or full report showing the list of reasons the IRS did not accept the offer.
The taxpayer can ask for the information under the Freedom of Information Act if the IRS refuses to comply.
What to Do If The IRS Rejects an Offer In Compromise (OIC)
If the IRS has rejected a taxpayer’s OIC, two alternative courses of action are still available:
- Many times the IRS OIC case officer will be open to reconsidering the offer and open to further negotiation. The case officer might offer guidance on how to make the offer acceptable. The taxpayer may not need to start from scratch if their financial circumstances have not changed much. The case officer may ask the taxpayer to state a new offer amount in the form of a letter. Often the taxpayer will need to file a new offer and present new paperwork.
- The taxpayer can formally appeal a rejected OIC. The taxpayer presents IRS Form 13711, Request for Appeal of Offer in Compromise. The taxpayer should file this form within 30 days of the date of the rejection letter.
The Dark Side of Offer In Compromise (OIC)
If the IRS rejects an OIC, they still have a set of financial documents and disclosures.
The IRS has all the information it needs to take aggressive and immediate collection action against the taxpayer. A taxpayer should submit an OIC only when it seems likely that the offer will be accepted.
Another con is that interest continues to accrue throughout the OIC negotiation. The OIC can take a year or longer. Interest amassing over a 12-month period could be great.