You may have seen and heard the commercials claiming the Internal Revenue Service (IRS) has settled a tax debt for pennies on the dollar and wondered if that was possible. In this article, we share insight on what options the IRS offers to taxpayers with outstanding federal tax debts who are seeking to resolve their debt for less than the amount owed.
What is an offer in compromise?
An offer in compromise is an agreement with the IRS that settles a tax liability for less than the full amount owed. If you have received a notice regarding an outstanding IRS tax liability, an offer in compromise may be a great opportunity to save money on your tax debt. But the IRS is not like other creditors – negotiating a successful offer in compromise is not a matter of simply calling the IRS and offering an amount you would like to pay to settle your tax debt. The reality is that the offer in compromise can be a daunting and time-consuming process.
Before submitting an offer in compromise, you must determine whether your account is eligible for resolution. To be eligible, you must file all back tax returns and get caught up with estimated tax payments (or federal tax deposits for businesses) for the current year. This may mean preparing a number of missing returns before an offer in compromise can be successfully submitted. If you have missing tax returns, Windham Brannon can help prepare the returns and help position your account for an offer in compromise with the IRS.
The IRS accepts three types of offers in compromise:
- Doubt as to Liability: There is doubt about whether the IRS has correctly calculated the tax owed and/or whether the taxpayer is the responsible party for those taxes.
- Effective Tax Administration: The tax liability amount is correct, and the taxpayer is the responsible party, but requiring payment in full would create an undue economic hardship or would be inconsistent with considerations of public policy or equity. This type of offer in compromise is extremely rare and limited to the most exceptional of circumstances.
- Doubt as to Collectibility: There is doubt as to whether the taxpayer has sufficient resources to repay the entire tax liability.
Because the first two types of offers in compromise are extremely rare, this article focuses on offers in compromise based on doubt as to collectibility. If you have questions or doubt as to liability or effective tax administration offers in compromise, please contact Windham Brannon so our specialists can discuss with you in detail.
What should I know about applying for an offer in compromise?
When you apply for an offer in compromise, the IRS will review your application and financial information closely to determine your ability to repay the tax debt. The application should include a completed Form 433-A Collection Information Statement for Wage Earners and Self-Employed Individuals (or Form 433B Collection Information Statement for Businesses) along with supporting documentation and other forms required by the IRS. The key considerations are your monthly income, essential expenses (per IRS guidelines) and the value of your assets. This information is used to calculate your future remaining income, which is used to calculate the reasonable collection potential and the minimum acceptable offer in compromise amount. The reasonable collection potential is the amount the IRS can reasonably expect you to pay toward the tax liabilities before they expire. If the reasonable collection potential is less than the total tax liability, then you or your business may be a good candidate for a successful offer in compromise.
Once your eligibility is determined, you must calculate the minimum offer amount the IRS is likely to accept, which is based on the financial information provided and the payment option you select.
How do I fund my offer in compromise?
A “lump sum cash offer” means the offer amount will be paid in five or fewer months after the offer application is accepted. To calculate the minimum lump-sum offer amount, you must multiply the future remaining income times 12 plus the value of your net equity in assets. A non-refundable deposit of 20 percent of the offer amount must be submitted with the offer in compromise application. The IRS will not refund the payment if the offer is rejected or returned for any reason. The taxpayer may specify how they would like the 20 percent payment to be applied towards their debt (i.e., which tax period to apply payment towards). The remaining 80 percent of the offer amount does not have to be paid until after the IRS approves the offer in compromise application.
A “periodic payment offer” allows the taxpayer to pay the offer amount (after the 20 percent downpayment with the application) in up to 24 months of the application acceptance. However, the periodic payment offer requires the taxpayer to continue making monthly payments while the IRS reviews the offer in compromise application. The monthly payments are also nonrefundable, and the taxpayer may designate which tax period to apply the payments. To calculate the minimum periodic payment offer amount, you must multiply your future remaining income times 24 plus the value of your net equity in assets.
There are benefits to each payment option. For example, under the lump sum payment option, you will not have to start making payments towards the remaining 80 percent offer amount until the offer has been accepted. On the other hand, the periodic payment option gives you more time to determine the offer amount. Ultimately, the lump-sum offer generally results in more savings in resolving the tax liability. Our Tax Controversy team can help you decide which payment option is best for you.
I submitted an offer in compromise, now what?
The IRS generally takes about nine to 12 months to review offer in compromise applications. While your offer in compromise application is pending, a collection hold will be placed on your account. This protects you against levies, wage garnishments and other enforced collection activities while the IRS reviews the application, for 30 days following a rejection and for the period in which a timely appealed rejection is being considered by the IRS Office of Appeals.
The offer specialist assigned to review your application will contact you or your authorized representative regarding any updated or additional information required. It is not uncommon for the offer specialist’s initial review to suggest that the offer is not acceptable. An experienced representative may be able to challenge the offer specialist’s position and demonstrate that an offer in compromise is a suitable resolution of your tax debt.
What if my offer in compromise is returned or rejected?
The IRS may return your offer in compromise for a number of reasons, including the following:
- The IRS determines the offer in compromise was submitted solely to delay collection efforts.
- The offer in compromise is missing information required to evaluate the application.
- The taxpayer has filed for bankruptcy and the proceedings have not been concluded.
- The taxpayer is not in compliance with federal tax return filing requirements.
- The taxpayer has not paid current tax liabilities at the time the IRS is considering the offer.
If your offer in compromise is returned, you can submit a new offer in compromise, but you will forfeit the application fee and any down payments you have made towards the offer (payments will be applied against the liability).
If the IRS rejects your offer, you will be given the opportunity to file an appeal with the IRS Independent Office of appeals within 30 days of rejection. You can also choose to file a new offer in compromise application with updated information. Alternatively, you may be eligible for a different type of resolution such as an installment agreement or currently not collectible status – both of which can be tailored to your financial circumstances to reach an affordable solution for your outstanding tax liabilities.
Windham Brannon’s Tax Controversy team can help you determine whether an offer in compromise or other type of agreement with the IRS can help you save money on your tax debt and put the stress of the IRS behind you. For more information, contact your advisor today, or reach out to Tomika Bullet.
