Taxpayers that are unable to pay their tax bill have several options. All is not lost. Taxpayers who can’t pay their tax liability or who create a financial hardship by paying this liability may take advantage of a federal tax program in which they utilize a mechanism known as an “Offer In Compromise” to resolve and settle these tax problems with finality. The Offer in Compromise (or “OIC” in IRS and legal jargon) program is not for everyone and the IRS advises that taxpayers explore all other payment options before submitting an OIC. An experienced tax professional is absolutely essential in all steps of the process of formulating, making, and awaiting the IRS to accept, an OIC.
The Offer in Compromise program is authorized under U.S. tax law (26 U.S.C. § 7122) which provides for an agreement between the taxpayer and the IRS that allows a qualified individual with unpaid tax liabilities to settle this debt by the negotiation of a settlement amount that is less than the total tax liability actually owed. An OIC may be a legitimate option if a taxpayer can’t pay his or her full tax liability, or doing so creates a financial hardship. The IRS considers a taxpayer’s unique set of facts and circumstances based upon the taxpayer’s, income, expenses, equity of held assets, and ability to pay. Simply put, the taxpayer is settling the debt for an amount which he or she has the ability to pay.
A taxpayer uses IRS Form 656 to determine eligibility for the program. In most cases, taxpayers with the ability to fully pay their tax liability through an installment agreement or other means will not be eligible for an OIC. Also, to qualify, a taxpayer must have filed all tax returns, made all required estimated tax payments for the current year and made all required federal tax deposits for the current quarter if the taxpayer is a business owner with employees.
The IRS determines if the amount offered is equal to or greater than the “Reasonable Collection Potential,” (“RCP”) which is how the IRS measures “ability to pay.” The RCP includes the value that can be realized from the taxpayer’s assets, such as real property, automobiles, bank accounts, and other property. In addition to property, the RCP also includes anticipated future income less certain amounts allowed for basic living expenses. The IRS generally approve an offer in compromise when the amount offered represents the most it can expect to collect within a reasonable period of time.
An offer in compromise requires certain forms (including Form 656) as well as a non-refundable initial application fee of $186. It also requires non-refundable initial payment for each Form 656. An experienced tax professional can help you determine which are the appropriate forms and how to calculate your payment accordingly. If a taxpayer meets Low Income Certification guidelines, the taxpayer does not have to send the application fee or the initial payment. Also, no application fee is required if the OIC is based on doubt as to liability. More importantly, the taxpayer will not need to make monthly installment payments during the evaluation of the offer in compromise if he or she qualifies under the Low Income Certification guidelines.
A taxpayer’s initial payment will vary based upon the offer and the payment option chosen by the taxpayer. There are two payment options: 1) (Lump-Sum Payments) Submission of an initial payment of 20 percent of the total offer amount with the application. Once the taxpayer receives acceptance in writing, the taxpayer pays the remaining balance of the offer in five or fewer payments; 2) (Periodic Payments) Submission of an initial payment with the application. The taxpayer then continues to pay the remaining balance in monthly installments while the IRS considers your offer. If accepted, the taxpayer continue to make monthly payments until the settlement amount is paid in full.
While the IRS evaluates an offer in compromise, other collection activities are suspended. In addition to this, the following generally occurs:
- The IRS applies the non-refundable payments and fees to the tax liability (taxpayers may designate payments to a specific tax year and tax debt);
- A Notice of Federal Tax Lien may be filed;
- The legal assessment and collection period is extended;
- Make all required payments associated with your offer;
- You are not required to make payments on an existing installment agreement; and
- Your offer is automatically accepted if the IRS does not make a determination within two years of the IRS receipt date.
If an OIC is accepted by the IRS, a taxpayer must meet all the “Offer Terms” listed in Section 8 of Form 656, including filing all required tax returns and making all payments. Any refunds due within the calendar year in which an offer is accepted will be applied to the tax debt. Also, federal tax liens are not released until your offer terms are satisfied. If an offer in compromise is not accepted by the IRS, a taxpayer may appeal a rejection within 30 days using the proper forms, which again necessitates the assistance and guidance of an experienced tax professional.
If you cannot pay your income tax liability, or doing so creates a financial hardship, consult with an experienced and knowledgeable tax attorney to determine if you qualify for an Offer in Compromise. Contact the tax experts at Thorgood Law Firm www.thorgoodlaw.com For a FREE consultation call 212-490-0704.
