Is an Offer in Compromise Right for You and Your Situation?
Offer in Compromise (“OIC”) is a program developed and run by the IRS allowing taxpayers to settle their tax debt for less than the full amount they owe. This is a useful program to look into if you are struggling to pay your state or federal tax debt, and need to settle your outstanding debt with the IRS for a lower, agreed-upon amount than what you originally owed. The idea behind the program is that many taxpayers cannot pay their tax liability without creating a financial hardship for themselves and their immediate household, so this might be a good solution for you.
In order to obtain OIC status, a taxpayer must submit an application which demonstrates financial hardship. If the IRS decides that you cannot afford to make any payments without financial hardship, then you will be awarded OIC status. However, it is important to remember that this status is only temporary and your income will be frequently under review to ensure that you still, ongoing, cannot afford to pay your tax debt.
You may want to take the OIC route simply because it is the only option that lowers the total value of the tax owed. It is also for this reason that this method is the most advertised settlement option by Tax Resolution companies and accounting firms. These days, the TV and radio are filled with ads claiming that people like yourself can (easily) settle their tax debt through this program. People who can’t pay their taxes may indeed investigate this overhyped settlement option; however, according to the IRS’s own statistics, it is highly unlikely that most taxpayers who have outstanding balances will have an OIC accepted. So as you explore this option, bear that in mind.
It should be noted that OIC acceptance is rare for two main reasons: Either the taxpayer does not qualify for an OIC or, if the taxpayer does qualify, he or she can’t pay the offer amount. My Tax Problem Solver Team and I can determine up front if you qualify.
Do You Qualify for an OIC?
The reality is, OIC qualification is based on a computation of a taxpayer’s ability to pay his or her tax debt before the IRS runs out of time to collect the debt (called the collection statute expiration date). Contrary to popular perception, the IRS decision is not largely subjective and is, instead, based on computational formulas. That is why IRS.gov features an OIC Pre-qualifier tool: https://irs.treasury.gov/oic_pre_qualifier/.
To qualify for an OIC, you must prove that you can’t pay the total balances owed before the collection statute expires, using net equity in assets plus any future income. The IRS calculates future income as the amount it can collect on a monthly basis (monthly disposable income) before the collection statute expires.
Although the qualification formula is objective, the components of the computation of net equity in assets and monthly disposable income are often the subject of much debate and confusion. However, once the “ability to pay” amount is determined, the computation results are clear: Either you cannot pay the taxes owed and qualify for an OIC, or you can pay the taxes owed and do not qualify.
Keep in mind, though, qualifying for an OIC does not mean you will obtain an OIC. To obtain an OIC, you must be able to pay the offer amount, which is the computed amount required to be paid to the IRS to settle the debt.
The Key Question is: Can You Pay the OIC Offer Amount?
(It gets more complicated, of course) The formula used to compute the offer amount differs from the formula used to determine your qualification. The qualification formula and offer amount formulas use the same computation for net equity in assets. However, the offer amount formula requires only 12 or 24 months of future income, rather than the full amount that the IRS could collect before the collection statute expires.
When calculating the offer amount, it is imperative to conduct complete due diligence, and this is a key aspect where my team and I can make a significant difference to help you. In taxpayers’ initial calculations, they often find that the offer amount is too high to consider an OIC as a viable option. In addition, during the IRS’s OIC investigation process, taxpayers may discover that they incorrectly computed net equity in assets and monthly disposable income, resulting in an offer amount that is much larger than expected and too much to pay to settle the taxes owed. You (or if you’re working with a tax professional like me and my Tax Problem Solver Team) must exercise great care and diligence in properly computing the OIC’s financial components to avoid a potentially costly, long investigation process when there might be a better alternative, such as currently not collectible status or an installment agreement.
Negotiating an Offer in Compromise
OIC applicants are generally put through a rigorous financial investigation before the application is approved. The IRS will consider many factors in their approval process, including whether there is any possibility that the taxpayer could pay off the whole debt in the future.
You must be very thorough before submitting an OIC. As you work through the application process, refer to the following checklist to be sure you’ve given your case the best possible chance of success:
First and foremost, ensure that you have no missing tax returns. The IRS will first check to see that you are current on all your returns – any missing returns will render you ineligible for the program. In fact, as of March 2017, all OIC applications will now be returned without consideration in instances where the taxpayer has not filed all required returns. In these cases, the application fee will be returned and any initial OIC payments submitted with the Offer will be applied to the outstanding tax debt.
Next, the IRS will perform an extensive review of your financial situation in comparison to the total debt you owe. Before submitting your application, you will want to review your finances to determine if you are eligible for an offer. Again, we can help with that. The key is to review the Collection Financial Standards on the IRS website in comparison to your current income and expenses.
Lastly, you (or someone representing you) should get in contact with the IRS agent reviewing your application. A tax professional can submit your application over the phone with the IRS and answer any questions the agent has at the moment. OIC applications can also be submitted through the mail, but if any specific points need to be discussed with the agent, you or a representative will need to call the agent and review the form with them as well.
If the OIC is Rejected, What Options are There?
If the OIC is rejected, taxpayers can submit an appeal within 30 days of the date on the rejection notice. The appeal will be submitted on Form 13711, “Request for Appeal of Offer in Compromise.”
This appeal letter needs to address the issues raised in the OIC rejection and you will likely have to provide additional documentation. If accepted, the appeal will allow you the opportunity to renegotiate your rejected offer under more acceptable terms for the IRS.
Offers in Compromise are a useful settlement option that can allow an eligible taxpayer a “fresh start” with their tax debt. Armed with the correct information, tax professionals like myself and my team, can guide you through this process with a thorough review of your financial situation in order to negotiate a successful outcome with the IRS. We would determine if this is a suitable option for you.
IRS Fresh Start Initiative
While the number of OICs accepted is actually small compared with the number of taxpayers who have outstanding balances, more taxpayers are qualifying for and obtaining OICs due to the 2011 IRS Fresh Start Initiative, which softened qualification criteria and allowed for lower offer amounts.
Prior to Fresh Start, the offer amount calculation generally produced a larger settlement payment because the future income multiplier was significantly larger, 48 months, instead of 12 months as a result of the Fresh Start initiative.
IRS data show much of the impact of Fresh Start changes: For example, a few years back, the IRS received 30% more OIC applications compared with a previous years, and the acceptance rate for OICs increased to 42%, up from 25% in 2010, the year before Fresh Start was implemented.
Do Your Due Diligence First
An OIC should be considered when you have a financial hardship and there is no possibility that you will be able to pay the taxes in full before the collection statute expires. The qualification and offer amount computations are fairly straightforward and can easily answer the question as to whether or not you should pursue an OIC.
However, determining your net equity in assets and ability to pay can be complicated. Closely examine your financial situation before you conclude that you qualify and can obtain an OIC. You may be better off with a more suitable collection alternative, such as currently not collectible status or an installment agreement.
My Tax Problem Solver Team and I can effectively determine your eligibility for an OIC – as well as handle all the complex issues tied to pursuing one – but more importantly, we can determine if there are even more suitable alternatives, such as those just mentioned. Email me at larry@taxproblemsolver.com or call me at (727) 894-2099. OIC is an involved process, but it might be perfect for your situation. Let’s talk about it.
About the Author Larry Heinkel J.D. LL.M
Larry Heinkel is a tax and bankruptcy attorney with more than 38 years experience helping businesses and individuals, solve their state and federal tax problems. Mr. Heinkel has been extremely successful in representing his clients before IRS and DOR, and is known throughout Florida as an expert in tax problem resolution.
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