Written by Grant McCainn
If you’re like most people, you don’t like to haggle and don’t feel like negotiating gets you that far, because you’re convinced that generally speaking many established companies or government agencies don’t really budge. It can be extremely stressful to consider that you’re stuck with a bargain that is either not very possible for you to achieve or that seems inflexible when you’re willing to comply, but need to discuss some mercy. Sometimes, taxpayers have legitimate doubts about their tax debt.
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There are many reasons that individuals or businesses find themselves needing to ask the IRS for an offer in compromise. An offer in compromise (OIC) is an agreement between a taxpayer and the IRS that settles the taxpayer’s tax liabilities for less than the full amount owed. Filling out necessary forms is part of the process. However, before you start filling out the necessary forms to have the IRS consider your offer, there are a few useful tips that may help you in your pursuit of a compromise with the IRS.
The IRS considers applicants eligible when a taxpayer isn’t able to pay the full amount in a reasonable time. This is decided after reviewing a taxpayer’s assets and income. The documentation is extensive and includes every detail of your financial life so that the IRS can feel justified in accepting your OIC. This assessment is called your “reasonable collection potential.” Taxpayers fill out Form 433-A (OIC) “Collection Information Statement” or a Form 433-B (OIC) and submit it along with a Form 656 “Offer in Compromise” request for an OIC.
Here are the top 8 useful tips on getting your OIC accepted:
Tip 1- Realizable Value of Assets + Income
The amount of your offer has to equal a “realizable value” of your assets plus the future amount of money the IRS could take from your potential income. Additionally, the IRS under its expanded Fresh Start Initiatives now only looks at one year instead of four years of your future income for offers that can be paid in five or fewer months. If the offer can be paid in six to 24 months, then the IRS only looks at two years instead of five years of your future income. Fresh Start softened qualification criteria and allowed for lower offer amounts and has increased the number of OICs accepted.
Tip 2 – File All Back Tax Returns
Before you submit your offer, you must file all tax returns that you are legally required to fill out. All the programs including the OIC are restricted to people who actually filed returns.
Tip 3 – Don’t Try and DIY
Although a lot of people figure that since they’ve done their taxes using the official booklets and forms that the IRS provides previously, they should use the DIY approach in making an offer in compromise to the IRS, DON’T. Here’s why. Basically, the IRS continually trains their offer examiners to look out for the best interests of the government. The IRS is very good at pressuring taxpayers and it really helps to have an experienced tax advisor that deals with the IRS regularly. They are less easily intimidated and they also are familiar with ways to deal with these tactics. A tax professional protects the taxpayers’ rights and gets them the best settlement and resolution possible knowing full well that the IRS is not going to make it easy for a taxpayer to wipe away a large fraction of your tax debt. They are charged with collecting by law.
Tip 4 – Don’t Accumulate More Tax Debt
While the IRS reviews your OIC, make sure you do not accumulate more tax debt. Some taxpayers put everything on hold during the collection process, but that’s not a good idea. If you need to pay a quarterly estimated tax, pay it, and don’t wait until you receive an approval or rejection of your OIC. While the offer is pending, the IRS does not take too kindly to taxpayers who add more tax debt and it may wreck your offer.
Tip 5 – Do Due Diligence
Always do your due diligence first before you submit an offer. If you submit a frivolous settlement amount by low balling numbers on your forms, don’t expect the IRS to accept it. Every number you put on your form needs to be supported and these supporting documents must accompany your forms. The IRS requires 3 months of documentation. You have to do the settlement offer correctly the first time, because the IRS will reject it otherwise. Then, you will have to restart the settlement process with a new application fee and another down payment.
Tip 6 – Provide Non-Refundable Payment with Application
You are required to provide an initial non-refundable payment along with your application. Don’t forget! These payments and application fees will be applied directly to your tax liability. You can specify which tax year and debt.
Tip 7 – Don’t Stall with Money
Some people wait to ask for an offer in compromise because they want to have more money at the time. It’s not a good idea, because many tax professionals know that the best offer in compromise a taxpayer can submit will be when the settlement petitioner has the least amount of assets and income. Consider borrowing money from family or friends. Remember the IRS can change the terms of the agreement if there is a sudden increase in income or there is an inheritance. Most importantly, it’s not a good idea to stall even if there is an income increase down the road.
Tip 8 – Have a Good Reason
Since the IRS wants to know why you believe you will not be able to pay off the entire balance, the IRS isn’t going to take just any reason. Good reasons do not include that just because we are in a recession you’re losing big clients. They are trained to evaluate claims based on future possibilities, so it’s possible that your business may increase and you don’t know this at the moment, so there might be a revenue stream that the IRS can collect against. They consider disability, substance abuse problems, huge balance amounts, dependent care, limited income potential as a result of advanced age, or serious health matters as good reasons.
In their policy statements on an Offer in Compromise, the IRS accepts an OIC when it is unlikely that the tax liability can be collected in full and the amount offered reasonably reflects collection potential. It’s considered a legitimate alternative to declaring a case as currently not collectible or a protracted installment agreement. They only have the authority to accept compromises in full settlement of a tax debt because of tax code, which provides two grounds for such compromises. One is “doubt as to liability” and the other is “doubt as to collectability.” If you have a doubt as to liability rather than collectability, then it is evaluated differently. If you have a legitimate doubt that you owe part or all of the tax debt, you need to complete Form 656-L “Offer in Compromise (Doubt as to Liability).” This allows you to dispute the amount of the tax debt not on the basis of collectability and ability to pay, but because you believe that you do not owe part or all of the tax debt.
While the Fresh Start Initiative has increased the number of OICs that the IRS extends to taxpayers based on legitimate reviews, taxpayers need to know that the evaluation of OICs takes time and a considerable amount of accuracy and expertise. Since the IRS examiners are there to protect the government’s interest in collecting taxes, you should confront this matter with professional help and all the supporting documents you need to present the best possible case to give your OIC the best chance of being accepted.
