Wednesday, March 30, 2011

IRS Settlement -- What is an Offer in Compromise -- Can I Settle for Less


What is an Offer In Compromise?





An Offer in Compromise (OIC) is an agreement between a taxpayer and the Internal Revenue Service (IRS) that settles the taxpayer's tax liabilities for less than the full amount owed. If the tax liabilities can be fully paid through an installment agreement or other means, the taxpayer may not be eligible for an Offer in Compromise (OIC).

In most cases, the IRS will not accept an Offer in Compromise (OIC) 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.

With the downturn in the economy, the drop in real estate values and 401K's, the number of taxpayers who are eligible and qualified for an IRS settlement through the Offer in Compromise program has dramatically increased.

If you are on a fixed income, Social Security or Social Security Disability (SSDI) and you have a back tax debt owed to IRS, you are being silly and foolish if you do not take advantage of the IRS easing of the Offer in Compromise program.

The IRS must allow for such expenses as: rent, mortgage, health insurance, auto payment, auto expenses, child support, court ordered payments, secured loan payments, utilities, etc. There are caps that are allowed in the Offer in Compromise formula.

Easier access and acceptance to the Offer in Compromise program

“These changes to the Offer in Compromise program will help give taxpayers a fresh start,” said Doug Shulman, the IRS Commissioner, in a conference call with reporters. These changes “are especially appropriate as the American people and small businesses are climbing out of the worst recession in a generation.”

“I’ve made a whole set of changes to the Offer in Compromise (OIC) program since I’ve been here to try to increase the participation rate, increase the acceptance rate, because it’s good for the tax system,” Doug Shulman, the IRS Commissioner said.



The IRS may accept an Offer in Compromise (OIC) based on three grounds. 
  • First, acceptance is permitted if there is doubt as to liability. This ground is only met when genuine doubt exists that the IRS has correctly determined the amount owed. 
  • Second, acceptance is permitted if there is doubt that the amount owed is collectible. This means that doubt exists in any case where the taxpayer's assets and income are less than the full amount of the tax liability. 
  • Third, acceptance is permitted based on effective tax administration. An offer may be accepted based on effective tax administration when there is no doubt that the full amount owed can be collected, but requiring payment in full would either create an economic hardship or would be unfair and inequitable because of exceptional circumstances.

When submitting an Offer in Compromise (OIC), taxpayers must use the most current version of IRS Form 656, Offer in Compromise. Except when an Offer in Compromise (OIC) is submitted based on doubt as to liability, taxpayers must also submit IRS Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, and/or IRS Form 433-B, Collection Information Statement for Businesses. A taxpayer filing an Offer in Compromise (OIC) based on doubt as to liability must file an IRS Form 656-L, Offer in Compromise (Doubt as to Liability), instead of Form 656 and Form 433-A and/or Form 433-B. In general, a taxpayer must submit a $150.00 application fee along with the Form 656. There are two exceptions to this requirement. 
  • First, no application fee is required if the Offer is based on doubt as to liability. 
  • Second, the fee is not required if the taxpayer is an individual (not a corporation, partnership, or other entity) who qualifies for the low-income exception. This means that the taxpayer's total monthly income falls at or below 250 percent of the poverty guidelines published by the Department of Health and Human Services. 
  • If the total monthly income falls at or below the poverty guidelines, the taxpayer may submit an IRS Form 656-A, Income Certification for Offer in Compromise Application Fee and Payment, instead of the $150.00 application fee. The Form 656 package contains a worksheet and the IRS Offer in Compromise (OIC) Low Income Guidelines table to assist taxpayers in determining whether they qualify for the low-income exception. The Form 656-A and the worksheet must be submitted with the Form 656.

Taxpayers may choose to pay the Offer in Comprise amount in a lump sum or in installment payments. The tax law provides rules for "lump sum offers" and "periodic payment offers" submitted on or after July 16, 2006. A lump sum offer is defined as an offer payable in 5 or fewer installments. If a taxpayer submits a lump sum offer, the taxpayer must include with the Form 656 a nonrefundable payment equal to 20 percent of the offer amount. This payment is required in addition to the $150.00 application fee. The 20 percent amount is called "nonrefundable" because it cannot be returned to the taxpayer even if the Offer in Compromise is rejected or returned to the taxpayer without acceptance. The 20 percent amount will be applied to the taxpayer's tax liability. The taxpayer has a right to specify the particular tax liability to which the IRS will apply the 20 percent amount.

The Offer in Compromise is called a "periodic payment offer" under the tax law if it is payable in 6 or more installments. When submitting a periodic payment offer, the taxpayer must include the first proposed installment payment along with the Form 656. 

This payment is required in addition to the $150.00 application fee (unless it was waived). This amount is nonrefundable, just like the 20 percent payment required for a lump sum offer. Also, while the IRS is evaluating a periodic payment offer, the taxpayer must continue to make the installment payments provided for under the terms of the offer. These amounts are also nonrefundable. These amounts are applied to the tax liabilities and the taxpayer has a right to specify the particular tax liabilities to which the periodic payments will be applied.

COLLECTION ACTIVITY ENDS

The statutory time within which the IRS may engage in collection activities is suspended during the period that the Offer in Compromise (OIC) is under consideration and is further suspended if the Offer in Compromise (OIC) is rejected by the IRS and the taxpayer appeals the rejection to the IRS Office of Appeals within 30 days from the date of the notice of rejection.

If the IRS accepts the taxpayer's Offer in Compromise (OIC), the IRS expects that the taxpayer will have no further delinquencies and will fully comply with the tax laws. If the taxpayer does not abide by all the terms and conditions of the Offer in Compromise (OIC), the IRS may determine that the Offer in Compromise (OIC) is in default. To avoid a default, the taxpayer must timely file all tax returns and timely pay all taxes for 5 years or until the offered amount is paid in full, whichever period is longer. When an OIC is declared to be in default, the agreement is no longer in effect and the IRS may then collect the amounts originally owed, plus interest and penalties.

If the IRS rejects an Offer in Compromise (OIC), then the taxpayer will be notified by mail. The letter will explain the reason that the IRS rejected the Offer in Compromise and will provide detailed instructions on how the taxpayer may appeal the decision to the IRS Office of Appeals. The appeal must be made within 30 days from the date of the letter. In some cases, an OIC is returned to the taxpayer, rather than rejected, because the taxpayer has not submitted necessary information, has filed for bankruptcy, has failed to include a required application fee or nonrefundable payment with the offer, or has failed to file tax returns or pay current tax liabilities while the offer is under consideration. A return is different from a rejection because there is no right to appeal the IRS's decision to return the Offer in Compromise.

WHY WOULD YOUR OFFER in COMPROMISE BE REJECTED OR RETURNED

The IRS is the world's largest and most powerful collection agency. The function of the IRS is to collect money. The IRS is not a "consumer protection agency". The IRS did not suddenly become "warm and fuzzy". 

  • The IRS will look to continually reject your Offer in Compromise as "un-processable". 
  • Did you miss an item? 
  • Did you leave off some information by mistake?
  • Did you forget to "dot the i's"
  • Did you forget to "cross the t's"
  • Did you omit a document
  • Did you miss a deadline
The IRS will always be looking to collect as much money as possible. It is the taxpayer's responsibility to make sure the amount to be paid is correct, not the IRS'.

HOW LONG WILL AN OFFER IN COMPROMISE TAKE

The Offer in Compromise process can take as little as 6 months. However, with the volume of Offers during this period of economic unrest, the average Offer in Compromise is taking 13 months to complete.

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1 comment:

  1. If you are on a fixed income and/or do not have enough disposable income to pay your back tax debt, you would be silly not to consider an IRS settlement through the Offer in Compromise program.

    ReplyDelete