You’ve just been through a wild ride. You not only had to deal with the IRS, but you got hit with back taxes. You feel like you’re up against a wall with nowhere to turn and no way to pay. For some people, this is where an offer in compromise (OIC) comes into the picture. An OIC provides an agreement between the taxpayer and the Internal Revenue Service that settles a taxpayer’s liabilities for less than the full amount owed.
But wait! Before you start filling out that OIC paperwork, there are a few things you need to know.
Do you qualify for an OIC?
When receiving OIC requests, the IRS examines several factors, including your ability to pay, your income, your expenses, and your asset equity. If a taxpayer has the ability to pay the full tax liability through an installment agreement or other payment service, they will not qualify for an OIC in most cases. The IRS currently accepts requests for an OIC based on three grounds. A taxpayer must have:
- Doubt as to liability, which is when there is a genuine dispute against the existence or correct amount a taxpayer actually owes;
- Doubt as to collectibility, which means that a taxpayer’s assets and income are less than the full amount of the tax liability;
- Effective tax administration, when there is no doubt to liability or collectibility, but requiring full payment would create an unfair economic hardship because of exceptional circumstances.
Some of the top reasons OICs are rejected include additional tax debt accrual, missing information on OIC forms, a record of an open bankruptcy proceeding, unfiled returns, and “frivolous” OICs filed for the sole purpose of delaying collection action. Additionally, if a taxpayer’s OIC is approved and accepted, but fails to pay their taxes within 5 years, their OIC can be retroactively rejected. Appeals can be made within 30 days of the IRS decision to reject.
You’re approved! Now what?
The IRS has determined that you could not pay your back taxes and accepted your OIC. You have a fresh start with the government and that’s the end, right?
Not exactly. There will still be IRS rules and conditions that you will be obligated to follow in accordance to the OIC. (Remember the retroactive rejection?)
As part of your compromise, you will be expected to stay current on all of your tax filings and payments for the next five years. If a problem arises and you do begin to fall behind, the IRS will issue a warning and leniency period for you to catch up. Once that period is over, you run the risk of further action against you and your property as well as a reversal of your OIC acceptance.
You will also not be able to keep your tax refund. Any refund you are entitled to in the year the IRS accepts your OIC (and any years pending acceptance) will be kept by the IRS. It will also not be applied to pay your compromise settlement. The good news is that you will be able to keep all of your tax returns for any year after your OIC acceptance.
Do I have to do this alone?
Absolutely not! OIC approval and management are attainable when you have the right tools and team behind you. Finding a good tax relief company decreases the chance for paperwork mistakes, clarifies overwhelming and confusing details, and brings the expertise of tax professionals to your side. Tax relief accountants and attorneys are highly experienced in preparing, submitting and settling these cases, providing the best chance in successfully negotiating an OIC and helping you get your life back on track.
For more tax tools and assessments, visit the IRS website.