IRS & State Offer in Compromise Tax Settlement Guidelines
An Offer in Compromise is an uncommon way for taxpayers to settle their back taxes because only 1/4 more or less, are approved (37% in 2012 were accepted and 41.8% were accepted in 2013). It is one way though that you can legitimately settle your taxes with the IRS (and some states) for less than you actually owe. To qualify for an Offer in Compromise you must meet a strict set of requirements, also the amount you settle for depends on your total equity or “perceived equity.” The IRS will assess your financial situation, and you need to make an Offer that meets your “reasonable collection potential.” This is a formula that takes into consideration your assets, liabilities and disposable income.
The purpose of the offer in compromise program is to find the best solution that works best for both the taxpayer and the IRS. This means that the IRS needs proof that it is not worth it for them to pursue you for further collections because it will cost them more money to do that than they will get in return. However, be aware that even with an Offer In Compromise, 20% of the total offer must be sent in with your request. The 20% is not refundable if your offer is not accepted by the IRS so working with a tax expert is recommended. If the IRS does not accept your offer they will just apply the 20% or payment to your current amount due.
Offer In Compromise Requirements and Guidelines As Stated by the IRS
The IRS states you may legally compromise your back taxes if you meet one of the following requirements regarding your back taxes:
- Doubt as to liability – You are able to show that there is doubt that the tax amount assessed is correct.
- Doubt as to collectibility – This is the most common method used when people file for an offer in compromise. The person must show that it is highly unlikely that the tax amount owed will ever be paid in full.
- Effective Tax Administration - With this type, the debtor does not deny that the tax is correct and could be collected, but if it were collected it would be unfair or inequitable because it would create financial hardship. Typically when an offer in compromise is granted under this requirement it is the disabled and elderly.
Fresh Start Tax Updates to the Offer In Compromise ProgramThe IRS in 2011 relaxed policies that allowed more individuals with incomes of $100,000 or less to qualify for a streamlined Offer In Compromise, and taxpayers with up to $50k (previously only $25k), will also have the ability to qualify. There were other changes published by the IRS in regards to the future income calculation, allowable living expenses, and dissipated assets.
Future Income Calculation: In February of 2012, the IRS stated they will be more flexible in determining a taxpayer’s reasonable collection potential (RCP). Instead of considering 4 years of future income in determining a taxpayer’s reasonable collection potential for an offer to be paid in 5 months or less, they are considering only 1 year of income. For an OIC to be paid in 24 months or less, the RCP future income period been knocked down to 2 years from five years. This has resulted in 60% reductions in what has to be paid with OICs.
Allowable Living Expense Modifications – Income gets lessened by those living expenses that are acceptable in order to find out what a taxpayer can actually pay. Since the Fresh Start Program last year, the IRS has expanded allowable expenses to include payments for local and state back taxes. Those other tax payments as a whole would not count in their entirety but rather what percentage they make up of the total taxes owed both to the IRS and State/Local. This ratio would be applied to your monthly disposable income to find out what the IRS wants. Lastly, payments be made to federally guarnateed student loans are now considered allowable living expenses as well.
Dissipated Assets – These assets will not be a factor in determining a taxpayers reasonable collection potential anymore, unless the asset was dissipated within 6 months of a tax assessment. Furthermore, equity in assets producing income will typically not be included in the RCP calculation if the asset is essential to a certain business’s operations.
Filing For an Offer In Compromise Settlement
In order to file for an offer in compromise, you will need to complete a few forms, you may not be required to file all of these. These forms are the following:
1) IRS Form 656 - Offer in Compromise – This is the form where an actual offer is made to the IRS in which the tax payer offers a certain amount of money to the IRS in exchange for them canceling their outstanding IRS back tax amounts in exchange for that given amount of money.
2) IRS Form 656-A - Income Certification for Offer in Compromise Application Fee and Payment. If you are not required to submit a fee for the offer in compromise because of your income level, you must submit this form with IRS form 656. Generally this is used to avoid the OIC processing fee and 20% down payment because a taxpayer’s disposable income is low.
3 ) IRS Form 433-A – Collection Information Statement for Wage Earners and Self-Employed Individuals. This form is used to help the IRS determine the likelihood of them being able to eventually collect the back taxes from you. This form will give the IRS a detailed view of your unique financial situation.
4) IRS Form 443-B - Collection Information Statement for Businesses. This is like IRS Form 433-A, but is for businesses. You are required submit this form if you are compromising your business back taxes owed. Fill out both forms if you are compromising both.
Settling State Owed Taxes with an Offer in Compromise
Like the IRS, many states offer the ability to settle state taxes owed through an offer in compromise (some states have different names for them). Most of the time, if you qualify for an IRS offer in compromise it is likely that you will qualify for the state’s version of the offer in compromise.
To see if your state offers an offer in compromise, click your state on our state tax relief guide page. Each state page details that various settlement methods offered by the states, including the offer in compromise settlement method if applicable.
Why You Should Use a Professional Tax Service For An Offer In Compromise
This is the one filing with the IRS that can legitimately settle your back taxes for much less than you owe. According to application rates, around 25% of all Offers in Compromise are actually accepted. The majority of these applications are denied because they are not filled out properly or they do not meet the specified requirements of the IRS. The average tax professional (Tax Attorney or CPA) has worked on well over a hundred offer in compromise filings and is very aware of what is required in order to qualify. These professionals have the “IRS Formula” figured out. Not only are your chances a lot higher when using a tax professional, it is likely that you will be able to settle for less than if you did it on your own. When it comes to picking an amount to compromise your taxes for, it cannot be less than your total equity you have, having a CPA and Tax Attorney on your side is a good idea when picking this number.
At BackTaxesHelp.com we have a specialize have a team of tax professionals that specialize in getting offer in compromise filings accepted. If you are not a likely candidate, we will find the best settlement method for your particular financial situation. To contact our tax professionals, fill out the form here: Free Tax Consultation
IRS Offer In Compromise Help & Info
Offer In Compromise Help
Do you need help with an Offer in Compromise? Our Partner Tax Team (IRS Agents, Tax Attorneys, Tax Lawyers, CPAs) can ensure proper filing and acceptance by the IRS.
How to Pay Back Taxes
If you do not meet the qualifications for an offer in compromise, it is likely that you will be able to qualify for a different for of payment.
How to Settle Back Taxes
All the available options for settling back taxes. If you don’t qualify for an offer in compromise, you will qualify for some other sort of settlement.
Options When You Cannot Pay Your Taxes On Time
Options for those you can pay a little or nothing to the IRS for back taxes owed. Detail review of each option if you cannot pay your State or IRS back taxes.
Possible OIC Outcomes