What is an Offer in Compromise?By filing an Offer in Compromise, you are offering to pay less than the full amount of your tax debts to the Internal Revenue Service. The IRS, at its discretion, may accept less than full payment of your tax debts if there is doubt as to whether the IRS could ever collect the full amount of tax debt or if there is doubt as to whether you are actually liable for the tax debt. Submitting an offer in compromise is one of five ways to get out of tax debt.
How Do I Apply for an Offer in Compromise?You will need to fill out Form 656, Offer in Compromise, along with Form 433-A, Collection Information Statement. You will also need to calculate the payment amount you offer to the IRS using the Form 433-A Worksheet.
What are the terms and conditions of the Offer in Compromise contract?The IRS sets forth all the Contractual Terms in an Offer in Compromise
In a nutshell, you agree to
- Pay the offer amount in the Offer in Compromise.
- File your tax returns on-time and pay your taxes on-time for the next five years.
- Let the IRS keep any tax refunds, payments, and credits applied to your tax debts prior to submitting your Offer in Compromise.
- Let the IRS keep any tax refunds that would have been payable to you during the calendar year that your Offer in Compromise is approved.
What can I do to protect my Offer in Compromise from being revoked?If your Offer in Compromise has been approved, you need to make sure the IRS does not revoke your Offer. At all costs, make sure that you:
- File your taxes on-time for the next five years.
- If you cannot file by April 15th, request an automatic extension. Definitely file your taxes by the extension deadline.
- Pay your taxes on-time. If you owe, your taxes must be paid in full by April 15th. Make estimated payments or extension payments to make sure you don't have a balance due.
Can I pay "pennies on the dollar" to settle my tax debts?The marketing slogan, "pay pennies on the dollar," can be misleading. In a successful offer in compromise, the taxpayer pays less than the full amount taxes, penalties and interest. However, the taxpayer must prove that the amount he or she is paying is equal or more than the reasonable collection potential as determined by the IRS. The reasonable collection potential, broadly speaking, is the IRS' best guess about how much money you could come up with in the next 24 months to pay off your tax debts.
How many Offers in Compromise does the IRS approve each year?The Internal Revenue Service approves only a minority of offer in compromise applications each year. In 2004, the IRS approved 19,546 offers, about 16% of the total number of offers received. As of May 2010, the IRS has accepted about 24% of offers. (Source: National Taxpayer Advocate, 2011 Objectives Report to Congress.)
The key to a successful Offer in Compromise is making sure that the IRS can process your application, and that you submit complete backup documentation to support your offer.
How long does it take to get an Offer in Compromise?It will take one to two years to complete the Offer in Compromise process. The time line for an Offer in Compromise looks like this:
- Preparing the Offer in Compromise forms and backup documentation (1-4 months)
- IRS Processing of your Offer in Compromise (13-18 months)
- Finalizing the Offer and Making Payment Arrangements (1-3 months)
Is there a fee for submitting an Offer in Compromise?The IRS charges a user fee of $150 to process an Offer in Compromise. You must pay this fee whether you prepare the Offer yourself or hire a tax professional. If you are living below the poverty line, the IRS will waive the $150 fee if you submit Form 656-A to request a fee waiver.
I want to prepare an Offer in Compromise myself. What do I need to do?You will need to prepare IRS Form 433A and Form 656. You will also need to collect an extensive set of backup documentation.
If you are self-employed or are requesting an Offer for you business taxes, you will need to prepare IRS Form 433B in addition to Forms 433A and 656.
Where do I submit my Offer in Compromise paperwork?Submit your Offer in Compromise application, forms, and supporting documentation to the appropriate IRS Service Center. See the IRS web site: Where to Mail Form 656, Offer in Compromise
What if I don't qualify for an Offer in Compromise?If you don't qualify for an Offer in Compromise, you should consider setting up an installment agreement to pay off your tax debts. You will want to seek the help of a tax professional to evaluate alternatives for handling your tax debts.
Here’s some good news for Americans drowning in overwhelming tax liabilities: the IRS is offering more help to substantially reduce their balances.
The agency announced last week that it is expanding the Fresh Start program to include more favorable qualifications for its Offer in Compromise (OIC) program. Despite the commercials from tax professionals promising to help tax-burdened consumers get the ability to “pay pennies on the dollar,” it has not been that easy to settle up with the IRS for a reduced balance.
In fact, historically, the IRS accepts only about 34% of all offers that come through.
All that is about to change with the program’s expansion. The IRS will still use a set formula to determine the amount it is willing to accept, but the variables are changing. This means that the standards will be much more relaxed and will help more taxpayers land on their feet. Not only will more offers be accepted, but the processing time--which can sometimes take up to a year but average about six months--will be decreased.
Here’s how it used to be under the original OIC program: When you complete IRS Form 433-A to accompany the offer request, you state your monthly income and expenses. The difference between the two numbers is multiplied by 48 if you intend to pay off the offered amount in less than five months or it’s multiplied by 60 if you intend to pay it off over a longer period of time. So if your income is $3,000 per month and your “allowable” expenses (more on that later) are $2,900 per month and you intend to pay off the compromised balance immediately then the IRS, given all other qualifications have been met, will be willing to accept $4,800 plus the net “quick sale value” of your assets in which you have equity. It doesn’t matter if you owe them $10,000 or $100,000, this is what they are willing to accept.
The little quote marks surrounding allowable expenses indicates the area most taxpayers misunderstand when it comes down to how their offer is calculated. The IRS has a set of National Standards to determine expenses related to housing, transportation, and household expenses. For example, if your house payment is $2,500 per month but the National Standard for your particular area is $1,400 per month, the IRS will use that number instead. Live some place cheaper is the agency’s motto.
As you can see, what you assume are your bona fide expenses may differ from what the IRS calculates, and the agency previously didn’t consider unsecured debt. When it comes to monthly payments to credit card companies, the IRS’ stance is “let them stand in line behind us.” That’s why it’s important to crunch your numbers with a tax pro who understands the OIC process to make sure you have a valid offer.
The IRS now has new, more relaxed National Standard tables for housing, transportation, and household expenses. The agency is willing to accept higher costs. In fact, a miscellaneous allowance will be included where a certain percentage of credit card payments can be listed as an allowable expense. Previously, student loan payments and delinquent state and local income taxes were not allowable expenses, but now those numbers will be considered in the formula.
The best news is that the multiplier is being reduced: Instead of taking the disposable income amount and multiplying it by 48 or 60, it will be multiplied by 12 or 24, respectively. And if you have income-producing assets in a viable on-going business, the equity in those assets will not be considered when adding the value of total assets to disposable income.
The IRS wants to work with taxpayers and businesses to ensure productivity in this bad economy. So if you have a big tax liability and you’re on the broke side, fill out Form 433-A, take it to your tax pro to crunch the numbers to see if you can settle for “pennies on the dollar!”
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