IRS Offer In Compromise: How To Reduce Tax Due To Hardship

IRS Offer in Compromise

Many fear the tax man as they may a policeman or judge when they have done wrong! Fear not – if you are in a genuine state of hardship you can reach an agreement with the IRS to get tax relief help that year. The Offer In Compromise (OIC) is available in certain circumstances when you can prove you can’t afford your tax bill without extreme hardship and will reduce your tax bill. Let’s look at this and how to get a tax relief offer from the IRS.

IRS Offer in Compromise

According to the IRS website you can get an offer when you face the following three difficulties:

    1. “First, the IRS can accept a compromise if there’s doubt as to liability. A compromise meets this only when there’s a genuine dispute as to the existence or amount of the correct tax debt under the law.” If taxes were easy tax advisors would go out of business! There are frequently times when both you and the IRS may doubt the liability and in this circumstance they may allow a compromise to proceed.
    2. “Second, the IRS can accept a compromise if there’s doubt that the amount owed is fully collectible. 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.” A classic example where you could apply for a compromise may be you or your business having a bumper year followed by one where you’re struggling to keep afloat. The tax demand will come in just when you least need it and you have neither the assets to sell or the income to pay the monies owed.
    3. “Third, the IRS can accept a compromise based on effective tax administration. An offer may be accepted based on effective tax administration when there’s no doubt that the tax is legally owed and that the full amount owed can be collected, but requiring payment in full would either create an economic hardship or would be unfair and inequitable because of exceptional circumstances.” An example might be you may have to sell essential equipment used to make your business function or even go out of business to meet your liability – an offer in compromise could save your business here.

The IRS will then work out how much it can reasonably expect to get out of you without causing severe hardship. A 2015 Forbes article explained how the offer in compromise repayments would then be calculated: “The IRS looks at the taxpayer’s income and assets to make a determination of the taxpayer’s “reasonable collection potential.” Compromises are subject to acceptance on legal requirements. To determine the taxpayer’s ability to pay, the IRS determines a value of the taxpayer’s assets and adds the value of his ability to pay in the future. The combined value of those two components is known as “Reasonable Collection Potential” (RCP).”

How to get an offer in compromise

The process will be explained to you by your tax resolution specialist if you have one but a reasonably simple explanation can be found on the the IRS website here. Getting an offer in compromise is no walk in the park and you should not consider it as an ‘easy way out’. Applying for a compromise centers on Form 656 and Form 433-A (OIC). A guide for those forms can be found here (Form 656-B).

The first thing to note is that you will have to pay a $186 fee if the offer in compromise application is for a business. If you are an individual on a low income (that is measured as your total monthly income being at or below 250 percent of the poverty guidelines published by the Department of Health and Human Services) the offer in compromise fee will be waived. Also, if the offer is due to a tax liability dispute the fee will also be waived.

You then need to prove your circumstances so the IRS are absolutely certain that you cannot meet your liabilities. Your tax advisor can help you with this – if not, be assured that this involves piles of paperwork and time you may prefer to spend doing other things such as running your business.

The next point is that, should you apply for a compromise, you will get no tax rebate owed for this financial year or any previously. This will be simply written off and will not count towards your settlement. A June 2018 article in The Balance suggested, “you can sell some profitable investments and generate some capital gains which you’d have to pay taxes on, or perhaps you can convert some of your traditional IRA into a Roth IRA. Maybe you could pay more self-employment taxes by claiming fewer business expense deductions. You could also adjust your paycheck withholding or estimated tax payments to keep your withholding and/or estimated payments as close to your tax liability as possible.”

Paying your compromise

You have two options as to how to settle your offer in compromise with the IRS. The first is a ‘lump sum cash offer’ where after a down payment of 20% of the agreed repayment you will make 5 or fewer repayments to settle the compromise. These payments must be made while the IRS reviews your offer and are non-refundable.

The next situation will apply far more often to those struggling – the Periodic Payment Offer. Not everyone who is in hardship can promise several thousand dollars in a year. In this situation you will agree a repayment plan with regard the offer which may well be 24 monthly repayments. You will enclose your first payment in the OIC and must then pay your offer monthly even while the compromise is being considered. These payments are non-refundable, even should the IRS reject your offer and demand more money.

When an offer in compromise is not applicable

If you have failed to file all the tax returns you should have over the years preceding your financial difficulties you will not qualify for an offer from the IRS. Another situation where you cannot offer a compromise is where you have already filed for bankruptcy and proceedings are live. A third situation is where one year previously, instead of filing for an offer in compromise, you have failed to pay your taxes. In short you should have done everything by the book in regards the IRS for it to consider leniency on your current tax burden.

Appeals

After going through this process you may find that the IRS rejects your offer, even while taking payments. Be reassured that there is an appeals process but again, this can be long winded and may not achieve the desired result of a reduced tax payment. If you have not at this stage, consider getting a tax resolution specialist to help.

The Takeaway

The IRS offers the offer in compromise where it agrees it would otherwise be impossible to collect taxes from you. It isn’t easy and shouldn’t be considered in any way as a way of simply avoiding your overall tax liabilities. It is a better option than simply failing to pay and being hunted down by the tax man!


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