Hello there, this is Tom Strauss, owner of Prime Accounting Services and Tax Help Now. My companies offer tax return preparation and tax resolution services to individuals and small businesses nationwide.
In the last post I discussed the Installment Agreement, which is the most common form of tax resolution used by taxpayers. Now I want to provide information about the option you’ve likely heard about on television. I’m talking about the Offer in Compromise.
When Things Are Looking Really Bad, Make an Offer
Let me get this out of the way right up front: the Offer in Compromise (OIC) is just about the last resort when trying to find a solution to your tax debt. As the name implies, the OIC is a request to the IRS that they compromise to some extent the amount of tax you owe. While this may sound like the first option you should pursue, it isn’t. Your finances are thoroughly scrutinized to determine if it’s in the best interest of the US government to write off part of your tax debt. If they determine you have ANY means of paying off the entire amount before their collection deadline, they won’t compromise.
There are three basic versions of the OIC. They are:
- Offer in Compromise – Doubt as to Collectibility
- This version is exactly what it sounds like; if there is doubt that the entire tax can be collected by the Collection Statute Expiration Date (CSED) through the sale of assets, future anticipated income, or a combination of the two, the IRS may decide to accept a lesser amount. Form 656 (OIC) and Form 433-A (Financial Collection Information Statement for Individuals) must be completed and submitted along with a non-refundable application fee and initial payment. The initial payment amount is based on whether you are asking for six months or twenty-four months to pay.
- Offer in Compromise – Doubt as to Liability
- If there is a genuine dispute as to whether the amount of tax you were assessed is accurate, this is the OIC version to file. You apply by submitting Form 656-L, a statement of explanation as to why the tax amount in question is incorrect, and supporting documentation to prove your explanation. The offer amount must be more than zero, but it can be as low as $1. No application fee, Form 433, or initial payment is due with this particular offer. If your OIC for doubt as to liability is accepted, you can then submit an OIC for doubt as to collectibility if you still can’t pay the amount that was accepted. Or you can request an Installment Agreement.
- Offer in Compromise – Effective Tax Administration
- When a taxpayer agrees with the amount of the tax and has the ability to pay it, but as Form 656 states, “due to my exceptional circumstances, requiring full payment would cause an economic hardship or collection of the full liability would undermine public confidence that the tax laws are being administered in a fair and equitable manner”, this OIC version might be a viable option. This type of OIC is rarely used, but in the right situation, will be considered by the IRS and their legal counsel.
All versions of the OIC require that you’re current in filing your tax returns, paying any required estimated taxes, and have made all required federal tax deposits. An OIC won’t be considered for taxpayers in bankruptcy proceedings or if you’re in the process of being audited. Businesses can also submit OICs. The major difference is the Financial Collection form; businesses complete Form 433-B rather than 433-A.
Offer in Compromise Application Isn’t for The Faint of Heart
The Offer in Compromise application for doubt as to collectibility is complex, to say the least. Not only is Form 656 a bit difficult to decipher, but Form 433-A is a nightmare to complete. Every aspect of your personal and self-employment finances is asked for on the Financial Collection form, and you declare and sign it as being accurate under penalty of perjury. Trust me, you don’t want to be found guilty of lying, intentionally or not, to the IRS. Unless you want to know what being incarcerated feels like.
Additionally, the preparation of the OIC paperwork takes a good bit of knowledge of what the IRS allows, what they are looking for, what they’re willing to accept, and what will get an OIC rejected. I don’t say this just because I want you to pay me to complete the paperwork for you. I say this because I’ve found it to be true. Taxpayers attempt to complete the forms themselves, only to have their offer rejected for simple reasons that easily could’ve been avoided. The IRS isn’t always difficult to work with, but when asking them to reduce your tax bill, you most certainly want experience on your side.
What If You Can’t Pay Anything Now?
There is one other method of relieving the burden of paying back taxes, and that’s having the IRS determine that you should be classified as “Currently Not Collectable”. This status designation usually requires a Form 433 to show you can pay absolutely nothing currently. For truly hurting taxpayers, obtaining this status means you could potentially go years without paying on overdue taxes, and in the end pay little or nothing in total. However, be aware that the IRS will want an updated Form 433 every year or so to monitor your ability to start making payments.
Thus far I’ve highlighted the methods of getting the IRS off your back by entering an agreement to pay back some or all of the back taxes you owe. In the final segment of this series, we’ll look at some of the notices you may receive during the IRS collection process, and how you should respond. Until then, if you want to discuss your particular situation, feel free to contact me. You can call me at (317) 804-1174 or send an email to firstname.lastname@example.org.