Offer In Compromise
“In this world, nothing can be said to be certain, except death and taxes” is a quote from Benjamin Franklin that still rings true today. It can seem like taxes are a part of almost everything we do nowadays, and for some people, that can mean trouble. Owing the IRS tax debt can take some people months or even years to pay off entirely, which can be very frustrating for someone who’s struggling just to make minimal payouts. It can get to a point where it seems utterly hopeless. Fortunately, the IRS can be reasonable in circumstances where it doesn’t look like you’ll be able to pay it off completely by offering a service called Offer in Compromise or OIC.
You may have seen offers for OICs advertised on television commercials (they’re the ones that talk about how you’ll only have to “pay pennies on the dollar”). These commercials don’t have a lot of time to fully explain this complicated process, so anyone who’s interested in reducing the amount of taxes they have to pay will most likely have a lot of questions. Let’s take a look at a few common ones.
What is an offer in compromise?
Broadly speaking, an OIC is a way to simply pay less than the owed amount in order to settle your tax debt with the IRS. Paying less tax is something that everyone would love to do, so unfortunately there’s a rather lengthy application process to go through to even just determine if you’re eligible in the first place. On top of that, there’s no guarantee that they’ll approve it at all, as the decision is up to the individual examiners that will be reviewing your forms, and the IRS in general isn’t required to offer a compromise.
Can I really negotiate down my tax debts?
People oftentimes say there’s nothing free in this world, so hearing that the IRS will willingly just flat-out reduce the amount of money you owe them can be a difficult thing to believe, but the deal has been in practice for some time. Remember that the IRS is a governmental organization that is concerned with things like the public good.
Specifically, they’ll be looking to see if paying your owed tax bill would be considered ‘unfair’ or cause economic hardship. In addition to serving the public good, having them reduce your tax amount now might give you enough of an economic boost to pay them even more taxes later in life, once you’ve got some solid grounding.
However, the IRS will still want the majority of their taxes coming in smoothly, and OICs are certainly not an offer that’s available to everyone. There’s an eligibility and application process to go through. In fact, of everyone who has submitted an OIC claim, only around a quarter are actually accepted by the IRS.
Luckily, there is an appeals process that denied applicants can go through to get a second look.
Are pennies on the dollar realistic?
Almost every commercial you see about Offers in Compromise are going to be talking about how you will only have to pay pennies on the dollar of the full amount of your owed tax. This is certainly not unbelievable, as the IRS has been known in the past to accept as little as 1% of the total to pay off the entire bill. It’s certainly a possibility that you’ll only have to pay a few pennies on the dollar, but there’s a complex formula they use to determine how much should be paid and when. With that in mind, it’s important to contact an attorney so that you won’t have any unrealistic expectations about how much money you’ll actually have to owe.
How do I qualify for an offer in compromise?
Not everyone who wants to pay fewer taxes is going to be eligible. To qualify for an offer in compromise with the IRS, you’ll need to prove that you meet one of these conditions:
- Doubt as to collectability – This means the IRS will want you to show that they’re going to have trouble collecting the bill you currently owe. You’ll need to show that you’ll have trouble paying it now or even in the future during the statutory collection period.
- Economic hardship for paying in full – If it’s at all possible to pay your bill off, you’d need to show that paying it in full would be unfair or cause you a great deal of hardship.
- Liability doubt – If there’s reason to believe that the amount you’ve been required to pay to the IRS is incorrect.
So what exactly does that mean? It can be a bit hard to determine if you qualify for one of those three without a real metric to go by. Does it mean that you need to be on the verge of homelessness or starving in the streets? No, not at all.
Broadly speaking, the calculation for qualifying involves taking the sum of your assets, which would include any 401k’s, life insurance policy values, IRAs, and anything else along those lines, and adding it to the amount of your income multiplied by 48. If that total is over what is owed and if it’s above the IRS’s allowable expenses, then the offer will likely be accepted. Otherwise, it likely won’t.
The Fresh Start Initiative
In addition to the above, the OIC rules have been recently changed drastically to cause much more people to qualify under a program called the “Fresh Start initiative.” There are many types of people who benefit from their new process, some of them include the following:
- People that don’t have any retirement savings.
- Home renters
- Those with high tax liabilities and few assets or none at all
- Those who have been rejected for an offer in compromise in the past. This could have been due to either unfavorable dissipated asset determinations or even future income calculations.
- People paying off their student loans
- Those with state tax liabilities
- Business owners
These changes have made OICs a lot easier to qualify for. Even if you’ve had your OIC submission rejected in the past, make sure to contact us at Pearson Butler, PC to see if you qualify under the new initiative.
I think I may qualify. What do I do now?
So you’ve gotten all of that together and think you might qualify, so what now? It’d be best to then speak with an attorney. You’ll need to submit a few forms and several pieces of documentation. You’ll also be able to make an offer straight to the IRS if you choose.
Forms And Offers
IRS Form 656 is the Offer in Compromise form, which comes with a $150 application fee that must be attached once it’s sent in. This may be exempt if your monthly income is below the poverty line. If it is, then you’ll need to submit an Application Fee worksheet from the Form 656 booklet.
If there is a “doubt as to liability,” as mentioned in the qualification section, then you’ll need to fill out and file Form 656-L. These forms can be a lot more complex than the others.
Making An Offer*
If you’re making the IRS an offer to make five payments in five months or less, then you’ll have to send along a minimum of 20% of the overall offer. If this is what you’re planning to do, then you must continue to make those proposed payments while your form is still waiting for approval or rejection. The application fee is not refunded, even if your offer is rejected. The payments aren’t refunded either, but they’ll be applied towards your unpaid liability.
Form 433-A (individuals) or 433-B (businesses)
Another form you’ll need to send in is Form 433-A or 433-B, depending on if you’re an individual or business (self-employed people will need both). These forms are referred to as Collection Information Statements. This may need to include your spouse’s information if you have one and live in a community property state, even if they don’t owe the IRS any money. Make sure to proofread this form multiple times before actually sending it in, as the IRS is very critical of the information you submit on it, particularly when you’re not offering to make an installment agreement.
After you submit the forms, you’ll be asked to provide quite a few pieces of financial documentation. Here are a few of the documents that are commonly required:
- Vehicle Registrations
- Bank Records
- Pay Stubs
- Mortgage Statements
- 401k and any other statements for retirement accounts
- Health Care Expenses
- Household Expenses – including food, clothing, transportation, and child expenses.
- Credit card statements
- Complete tax and tax returns for the previous five years
- As well as many others
Unless stated otherwise, you’ll generally need at least three months worth of statements for each of the above items.
Why work with an attorney during an offer in compromise?
Not only will a trained attorney make submitting an OIC a lot easier, they’ll also be much more successful at getting an offer approved than you’d be on your own. Even if you think you qualify for an Offer in Compromise and have submitted the forms, the payments, and the proper documentation outlined above on your own, you can still be outright rejected for a number of reasons. In addition to that, it normally takes months to get your pending offer approved or rejected once you’ve submitted the proper forms. In some cases, it can take until the next year. If you decide to go on your own, you could have done something that would have caused you to be rejected and you wouldn’t even know about it until months down the line.
A qualified tax lawyer will be able to look over your personal finances and determine the best course of action to take for your own individual case. They’ll have had plenty of experience and will know what works and what doesn’t. In addition to that, attorneys will be able to help you deal with any collections efforts while you’re in the negotiation process. Choosing to get an attorney means you’ll be able to reduce your debt without having exaggerated expectations.
Why should I work with your law firm?
Pearson Butler, PC is dedicated to providing their clients with comfortable and thoughtful service throughout the entire situation. For us, clients aren’t just a case number; they’re a person with their own story and someone who deserves the best service available. We’ve made a commitment to regularly keep in touch with our clients throughout the length of their case and to have that case constantly monitored and maintained by trained lawyers, not paralegals, in order to give that client as good of a service as possible.
Mr. Jim Gilland himself has been practicing for around two decades, and we have worked diligently in that time to procure a positive relationship with the IRS, which ultimately benefits our clients. In addition to expertly handling your case, we’ll also make sure to keep you completely up to date about its current standing so you’ll be able to make informed decisions before deciding on any kind of settlements. Gilland’s knowledge and expertise has even led him to be featured on the Brian Tracey Show and numerous networks, including FOX, NBC, CBS, and ABC. He’s even been endorsed by famed Utah radio host Doug Wright.
If you or someone you know has OIC questions or IRS problems, make sure to contact the Pearson Butler today.
It is essential to work with an attorney when making your offer for the best possible chances at a successful OIC