Tax debts can be a burden. And some of you may feel like you’re in over your head. Unfortunately, sometimes, this is true. And in those cases come Offers In Compromise. Here’s our guide to Offers in Compromise, what they are, and what they can to for you.
What Is An Offer In Compromise
An Offer In Compromise (OIC) is essentially an agreement you come to with the Internal Revenue Service (IRS) in order to settle your tax debts. Not everyone who owes a tax debt is eligible for an OIC; it’s specifically made for those who are not going to be able to pay during the time that the IRS has to collect from them. If the OIC amount you’re offering to pay back is less than the reasonable collection potential (RCP), the IRS won’t usually accept it.
The RCP is a measure of one’s ability to pay back their tax debts. It includes the value that can be realized from the taxpayer’s assets, such as real property, automobiles, bank accounts, and other property. An RCP also accounts for potential future income.
Qualifying For An Offer In Compromise
There are three main situations where the IRS considers an OIC. These are the basic qualifications.
Doubt As To Collectibility
This, as the name suggests, “doubt as to collectibility” is when the IRS has a reasonable doubt as to whether or not they’ll be able to collect an owed debt within a certain period of time. To determine your collectibility status, the IRS considers the following three questions. If you answer “no” to these questions, your offer has a higher chance of being accepted.
- Question #1: Will the IRS be able to collect more via forced collections than by accepting your offer? The IRS needs to believe it is getting the best deal possible.
- Question #2: Does it look like your current financial situation will improve over time? If yes, and the IRS could collect the debt in the near future, it won’t accept the offer.
- Question #3: Will other people have reasonable cause to think that the OIC was in some way inappropriate?
Any offer made to the IRS must be at least as much as your RCP. You can calculate your RCP the same way as the IRS using a 433-A (OIC) form. Your RCP is equal to net income (monthly disposable income) multiplied by the payment period (12 or 24) plus equity in assets.
Doubt As To Liability
If an assessor or your tax debt makes a mistake when coming up with your tax bill or if an examiner refuses to accept your tax documents the IRS may consider there to be “doubt as to liability” which can, in some cases, qualify you to receive an offer in compromise.
Effective Tax Administration
You may also qualify for an OIC if you can prove that paying your tax debts would cause you serious financial hardship.
Other Minor Requirements:
Aside from falling into at least one of the three categories above there are also some other, more minor requirements to qualify for an OIC:
- You cannot currently be going through bankruptcy
- You must have filed all federal tax returns you are required to file
- If a business wants to apply, for the current quarter, it must have made all required federal deposits
- If a business’s sole proprietor and or partner owes, s/he must personally be in compliance with estimated tax payments
- You must submit the required documents. Please see documents and forms needed here.
If you need a tax attorney, give Ayar Law a call today at (248) 262-3400 for a free, confidential, no-obligation consultation.