What is Offer in Compromise?
An offer in compromise (OIC) is an agreement between a
taxpayer and the Internal Revenue Service that settles the
taxpayer’s tax liabilities for less than the full amount owed.
Absent special circumstances, an offer will not be accepted if
the IRS believes that the liability can be paid in full as a lump
sum or through a payment agreement.
In most cases, the IRS will not accept an OIC unless the
amount offered by the taxpayer is equal to or greater than
the reasonable collection potential (RCP). The RCP is how
the IRS measures the taxpayer’s ability to pay and includes
the value that can be realized from the taxpayer’s assets,
such as real property, automobiles, bank accounts, and
other property. The RCP also includes anticipated future
income, less certain amounts allowed for basic living
expenses.
IRS Tax Debt Relief -
Taxpayers should beware of promoters’ claims that tax debts can be settled through the offer in compromise
program for "pennies on the dollar".
Here are 5 steps to qualifying for an
Offer in Compromise
In order to qualify for an Offer in Compromise you must:
1. Have filed all your tax returns. If you have unfiled tax returns then, you must file them to qualify for an OIC.
Remember, it does not matter how much you owe, because you will not be paying that amount any way. So, if you have not already filed all of your tax returns and that includes employment tax returns, then get busy and file them as soon as possible. Unfiled returns are an automatic reason to reject offers in compromise.
2. You must not be in an active bankruptcy. If you are in an active bankruptcy and your tax liability will not be
discharged, wait untill the bankruptcy is closed to make the IRS an offer.
3. You are not eligible for an offer in compromise during an audit. If you are currently under audit, wait until the audit is over and the tax is assessed. If you appeal the audit or go to Tax Court you will have to wait until the case is over and the tax assessed to make an offer. If you are under audit and you don’t know whether to contest the adjustments you should think about the future. Will you be able to win? Will you be able to pay the amount even if you win? Do you owe other taxes? If you think you may want to submit an offer after the case is concluded, you may want to consider conceding the adjustments and proceeding to an offer. If you are not sure, I suggest professional help. Talk to a C. P. A. or an experienced return preparer before you decide. Keep in mind that most cases settle before going to court, but of those that do go to court the taxpayers usually loose.
4. You must be current with your estimated income tax payments if you are self employed or have non wage income. If you have not made any estimated quarterly payments for the last two quarters then you are not eligible. This means that if you are required to make estimated tax deposits, you will have to make estimated tax deposits for the last two quarters of the current year.
5. You must have filed all your employment tax returns (Forms 940 and 941) and be current with your Federal
Employment Tax Deposits for at least two calendar quarters. The IRS will automatically reject your offer if you have unfiled Form 940 or 941 tax returns. Also, if you have not made timely and adequate Federal Tax Deposits of Employment taxes for at least two calendar quarters, the Offer Specialist will reject you.
Required Documents for Filing an Offer In Compromise Process
Offer in compromise form 656When filing for an Offer in Compromise the IRS requires you to file several
documents in order to be considered for this type of tax settlement.
* IRS Form 656 -
* IRS Form 656-
* IRS Form 433-
Individuals. This is the form that should be used by individuals when filing for an offer in compromise. This form is used by the IRS to determine the likelihood of them eventually collecting the taxes owed from you. It is a 6 page document that will require you to give lots of personal information about employment, income, investments, banks, insurance, cash, credit cards and all financial information to make a solid determination about the taxpayers financial standing.
* IRS Form 433-
Other related documentation that is required other than IRS forms that is required is listed below. Typically 3 months worth of each form of documentation is needed(some of these documents are needed when filling out the IRS forms as well):
* Pay stubs
* Credit card statements
* Mortgage payments
* Bank statements
* Car loan statements
* Investment statements
* Health care statements
* Child care
* Housing
* Transportation
* Other expenses
* Copies of tax returns for the prior 5 years
* Copies of the tax returns for the years that money is owed
The Offer in compromise is a long and tedious filing with lots of documentation required. The IRS does not make it easy for individuals to receive this type of relief and they make sure it is only available to those individuals who really need it. It is best for taxpayers to work with a tax negotiation company when filing for an offer in compromise. A tax negotiation company can analyze an individual's financial situation and determine how likely they are to receive this form of settlement.
