OFFER IN COMPROMISE WITH THE IRS
WHAT IS OFFER IN COMPROMISE?
Offer in Compromise (OIC) with the IRS is a deal. It is an agreement between the taxpayer and the IRS that settles the taxpayer’s debts for less than the full amount owed. In many cases, the IRS will not accept an OIC unless the amount offered by the taxpayer is at least the reasonable collection potential (RCP).
HOW IS THE RCP DETERMINED?
The RCP is how the IRS measures the taxpayer’s ability to pay. This number is calculated by appraising the value of their assets—such as real estate, vehicles, bank accounts and other property. In addition to property, the RCP also includes projected future income, minus certain amounts for basic living expenses.
WHEN WILL THE IRS WILL ACCEPT AN OIC?
The IRS is willing to accept an OIC under 3 circumstances:
DOUBT AS TO LIABILITY
The IRS will accept a compromise if there is doubt as to liability. A compromise will only be met under this circumstance if there is genuine dispute of the existent or amount of the tax debt.
DOUBT AS TO COLLECTABILITY
The IRS can accept a compromise if there is doubt that the amount owed is collectible. Doubt as to collectability occurs in any situation in which the taxpayer’s assets and income are less than the full amount of the tax liability.
EFFECTIVE TAX ADMINISTRATION
The IRS can accept a compromise based on effective tax administration. The taxpayer’s offer may be accepted based on effective tax administration when there is zero doubt that the tax is legally owed and can be collected. However, requiring payment of the full amount may create economic hardship and/or would be unfair.
WHAT FORMS DO YOU NEED TO FILL OUT
When submitting an OIC, the taxpayer must use:
1. Form 656, Offer in Compromise, AND
2. Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals, AND/OR
3. Form 433-B (OIC), Collection Information Statement for Businesses.
A taxpayer submitting an OIC based on doubt as to liability must file:
1. Form 656-L (PDF), Offer in Compromise (Doubt as to Liability), instead of Form 656 and Form 433-A (OIC) and/or Form 433-B (OIC).
2. Form 656 and referenced collection information statements are available in the Offer in Compromise Booklet, Form 656-B (PDF).
IS THERE A FEE?
There is a $186 application fee that must be submitted with Form 656. This fee should not be combined with any other tax payments with the exception of:
1. No application fee is due if the OIC is based on doubt as to liability
2. No application fee is due if the taxpayer is an individual who qualifies for the low-income exception. See Form 656 Section 1 for the Low Income Certificate Guidelines.
WHAT ARE THE PAYMENT OPTIONS?
The taxpayer is offered different options to pay back, suspend or appeal the fee.
SUSPENSION OF COLLECTION
The time in which the IRS may actively seek collection is suspended during the period which the OIC is under consideration. It is further suspended if the OIC is rejected by the IRS and the taxpayer appeals to the rejection within 30 days from the date of the notice of rejection.
RIGHT TO APPEAL
If the IRS rejects an OIC, the taxpayer receive a letter via mail. The letter will elaborate on the reason for the reject and provide instructions on how the taxpayer may appeal the decision. The appeal must be made within 30 days of the date of the letter. Contact Chris Wynkoop ASAP to ensure all forms are properly filed on-time and all fees are paid to avoid additional dues owed to the IRS.
OFFER IN TERMS
The IRS accepts the taxpayer’s offer in good faith, with the understanding that the taxpayer will have no further delinquencies, and will fully comply with all tax laws. If the taxpayer does not abide by the terms and conditions of the OIC, it will be declared to be in default. The agreement will no longer be in effect and the IRS will collect the amount originally owed (minus payments made), PLUS interest and penalties. Any refunds due within that year will be applied to the debt.
RETURN OF AN OFFER
An OIC may be returned to the taxpayer, rather than be rejected. This can happen if the taxpayer:
- did not submit all the required information
- filed for bankruptcy
- failed to include a required application fee or nonrefundable payment
- has not filed required tax returns
- has not paid current tax liabilities
A returned offer is not a rejection. There is no right to appeal with the IRS returns the offer. However, if current, the offer may be resubmitted.
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