The IRS bases your settlement on your perceived equity in assets along with your income, and if your offer is less than your “reasonable collection potential”, the IRS will not approve it. In other words, the settlement depends on how much you own and earn, and if the IRS thinks it can collect more money from you, it won’t accept your offer.
In recent years, the IRS has rolled back some of the requirements, and as of 2017, the IRS accepts more offers in compromise than ever before. However, acceptance rates are still less than half. To boost your chances of approval, you should work with a tax professional.
There are three main types of offers in compromise:
To apply for an offer in compromise, you need to complete a few forms.
When you apply for an offer in compromise using Form 656, you must include an application fee and the first payment. As of 2017, the application fee is $186. If you are applying for a lump sum offer, your payment should be at least 20 percent of your offer.
If you are applying for a periodic payment offer in compromise, you must submit your first payment with the application. With a periodic payment plan, you pay the settlement amount over a six to 24 month period. While the IRS reviews your offer, you need to make your proposed monthly payments.
These payments are not refundable. If the IRS rejects your offer in compromise, the IRS will apply the payments to your taxes owed. However, if you send more than the required payment, you can note that the excess amount is a deposit. Then, if the IRS rejects your offer in compromise, you get a refund of that amount.
Note that if you are applying for an offer in compromise based on doubt as to collectibility using Form 656-L, there is no application fee. You also do not have to submit any payments. However, if you do submit a payment, the IRS keeps that amount and applies it to your taxes owed.
If you qualify for low-income certification, you do not have to make any payments while the IRS reviews your offer. The income amounts to qualify change annually, and the IRS uses different thresholds based on family size and where you live. For example, as of 2017, if you have a family of four and you live in the contiguous 48 states, you qualify for low-income certification if your gross monthly income is less than $5,125.
This only applies to individuals and sole proprietors. To apply for low-income certification, you simply need to check a box on Form 656. If you are applying for an offer in compromise for a corporation, an LLC, a partnership, or another business, there is no low-income certification, and you have to make the required down payment.
Like the IRS, many states offer settlements on taxes owed, and if you qualify for a settlement on your federal taxes owed, you will probably qualify for a settlement on your state taxes owed. Note that some states use the phrase “offer in compromise”, but others use different names for their programs. To see if your state uses offers in compromise, check out the state tax relief guide page. Each state page explains the settlement methods offered by that state.
To qualify for an offer in compromise, you cannot be in the midst of filing bankruptcy. You also must be up to date on your current tax payments such as estimated quarterly payments or sales tax payments. You must have all of your past due tax returns filed as well.
The IRS requires your offer to be worth the equity in your assets plus your future income minus your allowable living expenses. Here’s a closer look at what the IRS considers in each of these categories.
Assets — If you could sell your assets and cover your taxes owed, the IRS usually won’t accept an offer in compromise. Luckily, when filling out Form 433-A, you only have to account for 80 percent of the value of most assets. Additionally, as of 2017, the IRS allows you to have a bank account balance of $1,000 and a car worth $3,450. You have to note any assets that you have sold in the last ten years on Form 433-A as well as any real property you have transferred in the last three years.
If you have equity in income producing assets that are essential to your business, the IRS usually does not take those assets into account. Additionally, as of 2012, the IRS does not take into account assets you have sold or given away unless that happened six months before your tax assessment.
Future Income Calculation — When determining your collection potential, the IRS looks at your anticipated future income. For lump sum offers, the IRS looks at one year of income. For periodic payment offers, the IRS takes into account two years of future income.
Prior to 2012, when the IRS implemented the Fresh Start Initiative, the IRS looked at four years of future income for lump sum offers and five years of future income for periodic payment offers. This change reduced the average settlement by 60 percent.
Allowable Living Expenses — When determining how much you can afford to pay, the IRS uses a national standards allotment for food, housekeeping supplies, clothing, personal care products, and miscellaneous expenses. As of 2017, a single person gets $639, and a family of four gets a monthly allotment of $1,650 for all of these expenses.
The IRS uses local standards to determine how much you are allotted to spend on housing, utilities, and transportation. The IRS determines the local standards by state and county. Local and state back taxes and federally guaranteed student loans are included as part of your allowable living expenses.
If the IRS accepts your offer in compromise, you need to make your payments as outlined in the agreement. If you qualify for any tax refunds in the year during which your offer is accepted, the IRS keeps those amounts. That money does not go toward your settlement amount. However, if your offer in compromise is for doubt as to liability, you get to keep your refunds or apply them to your settlement.
You also must stay compliant with tax filing and payments for the next five years. If you fail to file a required tax return or make a payment, your offer in compromise defaults.
Once your agreement is approved, you cannot make changes. However, the IRS allows you to make one late payment in a 24-month period as long as the rest of the payments are on time. Once you make all your payments, the IRS removes any tax liens associated with that taxes owed.
If the IRS rejects your offer in compromise, the agency may make a counteroffer. If you don’t want to accept that offer or if the IRS has rejected without making a counteroffer, you have the right to appeal. You must appeal within 30 days using Form 13711 (Request for Appeal of Offer in Compromise).
Less than 50 percent of offers get accepted. The IRS rejects the majority of offers because the applicant does not fill out the forms correctly or because the taxpayer doesn’t meet the criteria.
The average tax resolution professional has worked on hundreds of offers in compromise filings, and they know what you need to qualify for particular tax settlements. These professionals have the “IRS formula” figured out. When you work with a professional, your offer is more likely to be accepted, and as an added bonus, a tax professional can help you get a lower offer.
At BackTaxesHelp.com we have a team of tax professionals who specialize in getting offers in compromise accepted. If an offer in compromise isn’t right for you, we can help you find a solution for your particular tax issue. To contact our tax professionals, fill out the form here: Free Tax Consultation.
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