Are you struggling to come up with money to pay off your Federal Tax obligations?
While there are many reasons people find themselves in tax debt, it should provide some comfort to know it is a very common scenario that can typically be resolved favorably with the right guidance. Specifically, the Internal Revenue Service (IRS) understands that sometimes people end up with more tax debt than they could ever pay back, or with inaccurately inflated tax debt, or with tax debt that should be forgiven due to other extenuating circumstances. The IRS knows that it is not in the best interests of the government or the taxpayers to let those kinds of debt linger indefinitely for years on end. In those situations, the IRS’s “Offer in Compromise” (OIC) program is an especially appropriate option to explore. However, the OIC program is much more than a simple arm’s length negotiation, and there are many potential pitfalls along the way. Even solid OICs can be rejected due to procedural or technical defects in the submission and negotiations.
What is an Offer in Compromise?
An Offer in Compromise is a form of settlement offer made by a taxpayer to the IRS to settle an outstanding balance for less than the full amount owed. The IRS will only consider an OIC if all tax returns have been filed and current estimated tax payments or tax deposits (as applicable) are being made. Further, one of the most important terms of an Offer in Compromise is that the taxpayer must remain in perfect compliance for 5 full years after acceptance of the OIC, or else the full amount owed comes back (minus the amount paid in the OIC). Therefore, the timing and details of an OIC submission are extremely important.
What are the Three Categories of Offers in Compromise?
There are three general types of OIC: (1) Doubt as to Collectability, (2) Doubt as to Liability, and (3) Effective Tax Administration. By far, the most predictable and commonly accepted OICs occur under the first option, “Doubt as to Collectability.”
- Doubt as to Collectability
This is the most common type of OIC and describes cases where the taxpayer doesn’t have the financial resources to pay the full amount owed. The taxpayer submits and the IRS reviews the taxpayer’s full financial profile, including all income, allowable expenses, equity in assets, investments, outstanding loans, and all other relevant financial information to determine the maximum “reasonable collection potential” (RCP) of the taxpayer. RCP is determined through the IRS’s OIC calculation process, which adds together a taxpayer’s total equity in assets and average net monthly income after deducting allowable living expenses. Either 12- or 24-months’ worth of net income is included to arrive at the OIC amount, depending on how long the taxpayer needs to pay the OIC amount. The most common version is where the IRS uses a 12-month timeframe to calculate the OIC amount, which then must be paid within 5 months after acceptance. Alternatively, if the taxpayer requests a prolonged payment plan to cover the offer amount, the IRS will then use the 24-month calculation and additionally require the taxpayer to make the monthly payments in advance while the offer is pending. For that reason, the 12-month calculation tends to be the most practical in most circumstances. Therefore, despite popular belief, this type of OIC is not based on how much you owe, but rather, it is based on what you can actually afford to pay back.
The IRS is not interested in wasting time trying to “get blood from a turnip” as the saying goes, so if they see their collection potential is limited, they will much rather settle for a flat amount than waste resources dragging out the collections process over several years. With that said, determining the exact value of your equity in assets and getting the IRS to honor all of your legitimate expenses can be a significant challenge, which is a big reason why experienced help is so valuable in this process.
- Doubt as to Liability
This type of OIC is appropriate for situations where the legitimacy of the tax liability is in question. If the IRS is charging you an amount that is inaccurate, but it is not realistic to amend returns, reopen an audit, or otherwise to correct the assessed balance, then this is a potential option. However, these OICs are not often approved, and it is typically better to correct the tax debt before trying to settle it. However, there are times where the Doubt as to Liability Offer is appropriate, so the key is to have the guidance of a tax professional with the experience to know the most efficient and effective way to resolve your tax debt.
- Effective Tax Administration
In these cases, the taxpayer does not dispute the legitimacy of the debt or their ability to pay it, but instead argues some other justification for the IRS to accept less than full payment based on general concepts of fairness and equitable administration of the tax code. One concept in this program is whether refusing to accept the offer under the circumstances would undermine the public’s confidence that the IRS acts fairly in administering the tax code. As open-ended and favorable as that sounds, it is actually very difficult to get one of these approved, and the arguments presented need to be overwhelmingly convincing and backed by established public policy.
Should I get professional help to negotiate an Offer in Compromise, or can I do it myself?
While the basics of the OIC program are fairly easy to understand, the procedural and technical aspects of the process can quickly get complicated, and inexperienced taxpayers and tax professionals often get their OIC rejected due to avoidable technical and procedural defects. As the OIC rules and procedures can be quite tricky, it is important that you have representation and guidance from an experienced, licensed tax professional who has successfully negotiated OICs in the past. One of the major reasons why having an experienced OIC representative is so important is that unless you prepare and present the OIC documentation in the specific, detailed, and professional format the IRS prefers, then the IRS is very likely to interpret it unfavorably and to quickly deny your OIC. Further, the IRS often starts by saying they will not approve the offer, and it is very common for people to accept that initial statement and accept failure of the OIC. IRS agents are people too, and as with every profession, some people will be tempted to be lazy, cut corners, and make things go away quickly rather than actually do their job. At Blueprint, a big part of our job is making sure the IRS does theirs while honoring your taxpayer rights, and unless your representative has done a lot of OICs, it is unlikely that they will have any idea how to utilize the IRS’s own rules to exert your rights to prevent a premature rejection of your OIC.
If you believe you could benefit from an offer in compromise, Blueprint Resolution Services is here to help. Contact us to learn more about the process and schedule a free consultation.