One option the Internal Revenue Service (IRS) created for taxpayers who owe back taxes is their Offer in Compromise program, sometimes abbreviated as OIC or simply, Offer.
The OIC is the IRS’s settlement program. You may have heard TV and/or radio commercials advertising, “Settle your taxes for pennies on the dollar.” This is what they’re referring to. An Offer is an agreement between a taxpayer and the IRS whereby the government agrees to accept a certain amount instead of payment in full for the total tax liability. Depending on the taxpayer’s financial situation, the settlement amount may be significantly less than the total, close to the full balance due, or anywhere in between. Once an Offer has been accepted and the full Offer amount paid, the IRS writes off the rest of the tax liability.
While this sounds like an amazing way to resolve tax liabilities, there are many things that potential applicants should know before deciding whether to pursue an Offer.
Should I Consider Submitting an Offer in Compromise?
The IRS considers the granting of Offers to be a privilege, not a right. As such, they’ve set criteria that taxpayers must meet before the IRS will even consider their OIC.
Taxpayers must qualify for Offers by demonstrating that they wouldn’t be able to pay their balance over the statutory time that the IRS is allowed to collect the liability.The Service determines if a taxpayer qualifies by combining their value in assets (such as bank and retirement accounts), equity (like property and vehicles), and future income (monthly income minus expenses, multiplied by the number of months the IRS can collect on the liability). If the sum of these items is more than the total taxes owed, you unfortunately don’t qualify. It’s not recommended to submit an Offer if you don’t qualify, as it won’t be accepted unless something changes by the time it’s reviewed.
Taxpayers must also be compliant with all required tax filings and deposits. Typically, these tax deposits have to do with the pre-payments of taxes that are required of individuals who are self-employed or don’t have enough taxes withheld, or the payment of employees’ withheld taxes by a business. If a taxpayer isn’t compliant when someone’s assigned to review the OIC, they may be given a short period of time to fix it. Otherwise, the Offer may be returned or rejected due to non-compliance.
Also, if the IRS feels that approving a particular Offer is not in the government’s best interest, even if the taxpayer qualifies,the Offer will be rejected. The Service might make this decision for: 1. A taxpayer who has repeatedly filed (and been penalized for) frivolous tax returns; 2. A taxpayer who is responsible for a business that has filing and/or payment compliance issues, or one that has a liability that hasn’t been resolved; or 3. In the case where the taxpayer used to have an asset but either gave it away or liquidated it to pay for items OTHER than taxes, and they aren’t able to include that asset’s value in the Offer. Every case is evaluated on its own merits.
How Much Do I Have to Pay and When Do I Pay It?
With few exceptions, and regardless of the amount proposed for the settlement, every Offer* requires an application fee. As of May 2020, this amount was $205.00. No matter the Offer’s outcome, this application fee will not be applied to either your tax liability or the Offer amount. The IRS will keep this amount as part of the cost to review your Offer.
Subject to certain reductions, the Offer calculation is similar to what’s discussed above. The biggest difference is that as long as the qualification is met, you’ll only have to include either 12 of 24 months of future income in the calculation. These correspond to the different Offer payment options that the IRS allows.
In a Lump Sum Cash Offer, 12 months of future income are included in the calculation. The applicant must make an initial payment of 20 percent of the settlement amount, in addition to the application fee, with the Offer’s submission. No further payments are required during the Offer’s consideration. The remaining 80 percent of the Offer amount must be paid within 5 months of the Offer’s formal written approval date.
Alternately, the Periodic Payment Offer includes 24 months of future income in the Offer calculation. With this option, the applicant divides the total Offer amount over 24 months and makes 24 monthly payments, beginning with the Offer’s submission, until the full amount is either paid, or the Offer is rejected or withdrawn.
*There’s a chart in the Offer booklet that shows Low Income Certification criteria. Anyone who meets these criteria is not required to make any OIC payments, including the application fee, until the Offer is accepted.
How Do I Apply and How Long Does This Process Take?
All forms needed to apply for an Offer are included in the IRS’s Offer in Compromise Booklet, available online here. It includes a list of substantiating documents that must be enclosed with the Offer.
Offers can be submitted under three different sets of criteria, based on the taxpayer’s specific circumstances: Doubt as to Collectibility, Doubt as to Liability, and Effective Tax Administration. These will be discussed more in future blog posts.
Once the IRS receives and confirms they can process an Offer, it generally takes a minimum of 5 months before an Offer Examiner (OE) is assigned to review the packet. The OE will then be in contact with the taxpayer or their representative to negotiate based on the information provided. The OE may request additional or updated documentation so they can make the best decision for all parties. During this process, the Offer amount and/or payment terms can be changed, depending on the OE’s findings and the taxpayer’s current situation.
After the Offer is accepted and the settlement amount paid in full, all liens should be released within approximately 30 days from the last payment clearing. It is recommended not to make the final payment by card, as it can take longer for the IRS to clear payments made by card than by check.
The IRS monitors the accounts of taxpayers who’ve had Offers accepted for a period of 5 years from the date the Offer is paid off. It’s very important to remain in compliance with all required filings and payments during this time. If the taxpayer accrues a new liability that isn’t paid off immediately, files returns late or not at all, or fails to pre-pay any required deposits within these 5 years, the IRS can default the OIC. If this happens, all taxes that were previously written off are reassessed to the taxpayer’s account, less any settlement payments made.
If the IRS rejects a taxpayer’s Offer, the account will typically go back to Collections for resolution within a few months. The taxpayer can work with Collections to establish an Installment Agreement (payment plan) for making monthly tax payments, or request placement into a hardship status, if their financial analysis supports that option.