As Ben Franklin once said, “In this world, nothing can be said to be certain, except death and taxes.” If you owe a tax debt to IRS, it can be a frightening experience. The IRS has the power to seize and sell your property, place a lien on your property, garnish wages, or even take money straight out of your bank account. If you owe a tax debt to the IRS it is critical that you reach a resolution as quickly as possible, and hopefully, one that is as beneficial to you as possible. For some people, the best option for a solution is the IRS Offer in Compromise (OIC) program. This article will explain what the OIC program is and how to file an OIC.
What is the OIC Program?
The IRS OIC program is a settlement agreement between a taxpayer that owes a tax debt (this includes both individual taxpayers and businesses) and the IRS, that allows for the taxpayer to resolve their tax dispute for less than the full tax debt amount owed. If a taxpayer qualifies for the OIC program they can make a monetary offer to the IRS for a full settlement of their dispute, which the IRS will ultimately accept or reject
The IRS has 10 years to recover any tax debt that a taxpayer owes. If they cannot recover the tax debt within 10 years, they cannot recover it at all. This is the advantage of the OIC program to the IRS. If they are unlikely to recover the full amount, they can at least recover the settlement amount from the OIC. And the taxpayer can breathe a sigh of relief knowing the IRS will not take any further action against them for that tax debt.
How to file an OIC.
The first step in filing an OIC, is to be eligible for it. Many taxpayers simply are not. There are several prerequisite requirements that a taxpayer must meet, including:
- You have filed all returns legally required. Any tax filings you have failed to file must be filed prior to filing the OIC. So, for example, if you owe back taxes because you failed to file one year, you will need to file for that year.
- You have received a bill from the IRS regarding your tax debt.
- You have paid your taxes for the current year.
- If you are a business, you must have made all required tax deposits for the current quarter.
Additionally, you are not eligible if any of the following is true:
- You are in a bankruptcy proceeding.
- You are capable for paying your tax debt in full.
If you are eligible the next step is to begin the actual filing process. You must fill out and file IRS Form 656, with documentation to support your settlement offer. In addition to Form 656, if you are self-employed you must file 433-A(OIC), and if you are a business you must file 433-B(OIC). There is a $186 filing fee to file a Form 656, which can be waived if you are a low-income individual. The $186 fee is non-refundable. However, if your OIC is ultimately rejected by the IRS, the $186 fee will be put towards your existing tax debt.
On Form 656 you make your settlement offer to the IRS, determine how you will pay it, and you also must include your first settlement payment along with the form.
What is a Good Settlement Offer?
The most important part of Form 656 is of course, your total settlement offer. This is the total monetary amount you are offering to pay the IRS to bring a final resolution to your tax dispute, and what the IRS decides to accept or reject. Your settlement offer should be more than what the IRS can expect to get from you if they were to take official action against you, such as enforcing a lien against your property or filing a lawsuit against you to recover the debt.
Generally, a settlement offer must equal at least one year’s worth of your disposable income in order to be accepted by the IRS. There is no guarantee that the IRS will accept this offer, but the IRS almost never accepts an offer less than this Your offer amount is based on a mathematical formula. Your disposable income is your monthly income minus your living expenses – things like your bills, groceries, and car payment, rent or mortgage, etc.. If you have assets that can be sold, such as valuable artwork, a car or sports memorabilia, the proceeds from that sale may need to be included in the offer as well.
So, as an example, if your monthly income is $2700 and your monthly living expenses are $2300, your monthly disposable income is $400. $400 x 12 is $4800. $4800 is your yearly disposable income. Your settlement offer, at minimum, should be $4800, and again this is not including any assets you own that may be included. It is also important to note that when filing Form 656 you must provide documentation substantiating and confirming your monthly income, monthly living expenses, and any assets and liabilities you otherwise have. The IRS may attempt to negotiate on the settlement offer before making deciding whether to accept or reject it.
Once you have made your settlement offer you must explain on Form 656 how you will pay it. There are two ways to pay the OIC, a lump sum or a monthly payment plan. If you choose a lump sum, you must include a deposit of 20% of your total offer along with Form 656. If your offer is accepted, you must then pay the rest of settlement offer off in no more than five regular installments within five months after acceptance. If you choose a monthly payment plan, you must determine how many months you will make payments, anywhere from 6 to 24 months, and include your first month’s payment along with Form 656. You will continue making monthly payments while the IRS determines whether to accept or reject your offer. Any money sent as part of a deposit for the lump sum, or monthly payment is nonrefundable. If the IRS ultimately rejects your settlement offer, that money will be put towards your existing tax debt.
It can take anywhere from 4 weeks to 8 months for the IRS to determine whether to accept or reject your offer depending on the complexity of your situation. If your offer is rejected by the IRS you may appeal the decision within 30 days. It is important to remember that if you decide to pay by monthly installments you must continue making the monthly payment while the IRS decision is pending. If you fail to make these payments while the decision is pending, your offer will be rejected, with no appeal possible.
Filing for an OIC can be risky, and there are certainly some disadvantages. First, the IRS has complete discretion to accept or reject an offer. It can be difficult to get approval for an OIC (especially without professional help). In fiscal year 2015 only 40% of OIC offers were accepted.
Second, it is very time consuming and tedious to file an OIC. The IRS can require you to turn over voluminous amounts of documentation verifying your assets, liabilities, and monthly expenses. Even if your OIC offer is rejected, it will still have a complete record of the documentation you provided and in some cases the IRS will use that documentation to take more aggressive steps to recover your tax debt.
Hire a Professional
It is important that if you decide to file an OIC, you retain the help of highly trained attorneys familiar with the OIC process to help you file it. Hired professionals can provide critical assistance to you for your OIC case and will always give you the best chance of the IRS accepting your OIC, help you negotiate with the IRS, and if rejected file an appeal.
If you would like to file an OIC, or even see if you qualify (or have any other tax issues) call the experienced attorneys at Ayar Law for a FREE, no-obligation tax advice. You can’t afford NOT to call 800.571.7175