When facing overwhelming tax debt, the IRS offers various options for tax resolution, and one that often captures attention is the Offer in Compromise (OIC). This strategy allows taxpayers to settle their tax liability for less than the full amount owed, sometimes for 90+% less than the assessed balance due. However, the eligibility criteria and application process can be complex. In most cases, if you can fully pay the liabilities through an installment agreement or other means, you won’t qualify for an OIC. In this blog post, we'll take a deep dive into the world of Offer in Compromise, helping you understand whether it's the right tax resolution strategy for your specific financial situation.
An Offer in Compromise is a potential lifeline for individuals and businesses struggling with substantial tax debt. It's an agreement between the taxpayer and the IRS that allows the taxpayer to settle their debt for a reduced amount, provided certain conditions are met. While OIC offers significant relief, it's essential to consider the following factors before deciding if it's the right path for you.
To qualify for an OIC, you must have filed all tax returns, have received a bill for at least 1 of the tax debts that are included in the offer, made all required estimated tax payments for the current year (if applicable), and if you are a business owner with employers, you must have also made all required federal tax deposits for the most recent and two preceding quarters. In short, the IRS wants to make sure you’re on track to make better decisions moving forward before deciding on settling your past due balances for less. Determining your eligibility requires a thorough financial analysis, and this is where professional assistance can be invaluable.
Reasons Why the IRS Accepts Offers
The IRS evaluates your ability to pay based on factors like income (current and future), expenses, assets, and equity. Generally, the IRS will consider your Offer in Compromise if there is (1) doubt as to liabilities (when there’s a true dispute about whether the amount due is correct under the tax law), (2) doubt as to collectability (when the taxpayer’s assets and income are less than the full tax liability), or (3) effective tax administration (when it would create an economic hardship or would be unfair and inequitable due to extenuating circumstances).
The Application Process
The Offer in Compromise process involves extensive documentation and can be time-consuming – even just a minor error or omission can lead to delays or rejection. Accurate and comprehensive financial records are essential to support your offer. A tax professional can help you gather and organize the required documentation, ensuring your application is complete and well-presented.
Offer Amount and Terms
Calculating the appropriate offer amount requires careful consideration of your financial circumstances and the IRS's guidelines. While an Offer in Compromise can significantly reduce your tax debt, proposing an unrealistically low amount may result in rejection. A tax professional can help you determine a reasonable and acceptable offer that maximizes your chances of approval.
If the IRS accepts your offer, you will have agreed to fully comply with the tax laws. The IRS will keep any refund, including interest, that might be due for tax returns filed through the date the IRS accepts the offer. If you do not abide by all the terms and conditions of the OIC, the IRS may determine that the OIC is in default.
Payment options include a lump sum cash offer, or a periodic payment offer (payable in 6 or more monthly installments and within 24 months after the offer is accepted).
Future Tax Compliance
For doubt as to collectability and effective tax administration OICs, the terms and conditions include a requirement that the taxpayer timely file all tax returns and timely pay all taxes for 5 years from the date of acceptance of the OIC (this is where ASE Group’s 4th step in our 4-step process comes in handy). When the IRS terminates an OIC, the agreement is no longer in effect and the IRS may then collect the amounts originally owed (less payments made), plus interest and penalties.
Offer in Compromise can be a powerful tool for achieving tax debt relief, but it's not a one-size-fits-all solution. Determining whether it's the right tax resolution strategy for you requires a thorough assessment of your financial situation and a clear understanding of the application process. At ASE Group, our experienced professionals are here to help you explore all available options and make an informed decision that suits your situation best. Contact us today to discuss your tax challenges and embark on the path towards financial freedom.