Each year, thousands of Americans face Internal Revenue Service (IRS) debts that they did not even know they incurred. Experiencing this can be frustrating and confusing for many people. While there are many components to exposing oneself to IRS debt, and even more ways to pay Uncle Sam, the Offer In Compromise (OIC) is one of those methods.
An Offer in Compromise is a contract connecting the taxpayer and the IRS, which settles the taxpayer’s liability for less than the original sum of the debt. According to the IRS, “If the liabilities can be fully paid through an installment agreement or other means, the taxpayer will, in most cases, not be eligible for an Offer in Compromise program. In order to be eligible for an OIC, the taxpayer must have filed all tax returns, made all required estimated tax payments for the current year, and made all required federal tax deposits for the current quarter, if the taxpayer is a business owner with employees.”
Typically, it is uncommon for the IRS to receive an OIC, unless the taxpayer pays an amount that is equal to or more than the reasonable collection potential (RCP). In most instances, the IRS measures each taxpayer’s potential to pay using RCP. The sum of the RCP may be the assessed value of “the value that can be realized from the taxpayer’s assets, such as real property, automobiles, bank accounts, and other property. In addition to property, the RCP also includes anticipated future income, less certain amounts allowed for basic living expenses,” according to the IRS.
Below are the three instances in which the IRS may accept an Offer in Compromise.
- If the IRS feels certain the taxpayer is liable for the debts. In this instance, the OIC would be rejected if there were a dispute over the responsibility of tax debts and the amount of debts incurred.
- An Offer in Comrpomise may also be accepted if the IRS feels as though the sum of the debt can be collected. According to the IRS, “doubt as to collectability exists in any case where the taxpayer’s assets and income are less than the full amount of the tax liability.”
- Finally, an OIC is typically accepted if the IRS feels as though paying the tax debt in full would place an unfair economic burden on the taxpayer due to their current circumstances.
If you are eligible based on these stipulations, your next step would be to submit the OIC. “When submitting an OIC based on doubt as to collectability or based on effective tax administration, taxpayers must use the most current version of Form 656, Offer in Compromise, and also submit Form 433-A (Offer in Compromise) (PDF), Collection Information Statement for Wage Earners and Self-Employed Individuals, and/or Form 433-B (OIC) (PDF), Collection Information Statement for Businesses. A taxpayer submitting an OIC based on doubt as to liability must file a Form 656-L (PDF), Offer in Compromise (Doubt as to Liability), instead of Form 656 and Form 433-A (OIC) and/or Form 433-B (OIC). Form 656 can be found in the Offer in Compromise Booklet, Form 656-B (PDF),” on the IRS website.
Knowing which information to include and which to omit when submitting an Offer In Compromise to the IRS is very difficult. Make one mistake and you can ruin your chances. It is best to hire a tax relief company to help you avoid this problem and make sure you are protected along the way.
If you or someone you know needs help paying their delinquent taxes or with an Offer in Compromise, it is important to contact a tax expert. The tax resolution attorneys at US Tax Shield can help you today.