It can be quite scary to owe back taxes to the IRS. After all, they can seem like a pretty uncompromising group. Their goal is to collect as much tax revenue as possible, but there are times you can reach a compromise and settle your taxes for much less than you owe.
What is an Offer in Compromise?
Although it’s not as simple as the television ads that claim to settle your IRS debt for pennies on the dollar. The IRS does accept offers less than the full amount, but under the right circumstances. An offer in compromise is a carefully calculated offer to pay the IRS a lesser amount than you owe, along with supporting evidence that it’s all you can afford to pay, or what you should owe, and it’s the best the IRS can reasonably expect to collect from you.
There are different types of offers in compromise (OIC) depending on your situation. What they all have in common is that you pay less than the amount assessed by the IRS to settle your tax debt. Depending on how it’s structured, your OIC can either be paid as one lump sum or in monthly payments to the IRS. If you’re making payments, you need to remain eligible for the program during the payment period, or your offer may be canceled and revert back to the full assessed tax debt.
What are the different types of OIC?
There are three main types of offers in compromise. Each can work for taxpayers in different ways.
Doubt as to liability: is used if you have a legitimate dispute over the amount of tax you owe. You’ll need to provide evidence that your income or deductions are different from what the IRS assessed and that you should owe less in taxes than they claim. This can be tricky to prove, as the burden of proof is on you. However, if you really do doubt the liability, work with a qualified tax resolution specialist who can help you assemble your documents and calculate what you should offer to pay.
Doubt as to collectability: These offers don’t claim that the IRS is wrong. Instead, they provide evidence of why the taxpayer will be unable to pay the full amount. The IRS allows for standard costs of living when they determine how much you can pay. Generally, they only have 10 years from the date the taxes were assessed to collect the tax debt. If your disposable income and assets over the remainder of the collections period add up to less than the taxes owed, you may have a good candidate for this offer in compromise.
There are a couple of things to keep in mind. One, the IRS uses standard figures to determine your cost of living, not whatever amount you happen to pay. Your tax resolution specialist can help you calculate the amount of disposable income the IRS will allow. If you offer a lesser amount, it’s almost certain to be rejected and you’re back where you started. Also, your income and expenses can be reevaluated periodically, so if you suddenly start earning more money, it can impact your accepted offer in compromise.
Effective tax administration: this offer in compromise states that the tax is owed and can be paid in full but would place undue hardship on the taxpayer or be inequitable under the circumstances. This is the most flexible OIC but requires adequate proof that paying the full amount would cause such a hardship. If you have extenuating circumstances, you may be able to qualify for this.
For instance, if you have a medical problem or disability that would place undue economic hardship on you if you paid the full amount, you may qualify. Or, if your tax preparer or accountant caused you to owe penalties and interest because of mistakes you weren’t aware of, it may be deemed inequitable to hold you responsible for the full amount.
Do you qualify for an Offer in Compromise?
In order to qualify for any type of OIC, you need to meet a few standards:
● You must be current on your tax filings, typically defined as having filed the past 6 years of tax returns, even if you didn’t owe anything on those returns.
● If required, you must have made all estimated tax payments for the current year.
● And you must have made all payroll tax deposits for the current quarter if you’re a business owner with employees.
Watch out for Tax Relief Scams
There are many companies, some legitimate and some not, that will offer to help you obtain tax debt relief. The shady companies can charge thousands of dollars in fees and accomplish nothing at all for you. There are also many companies that collect your information in order to generate leads that they sell over and over to tax resolution companies.
To find out if you qualify for an offer in compromise and calculate exactly how much you could save, consult with a qualified tax resolution specialist. My name is Noel Lorenzana, and I would be happy to assist you. I’m an Illinois licensed, Registered Certified Public Accountant with over 25 years of experience. Contact me for a consultation.
Do you have questions about Can an Offer in Compromise Help You Save Money on Your Tax Debt? I’m an Illinois licensed, Registered Certified Public Accountant with over 25 years of experience. I’m dedicated to providing outstanding tax and accounting services to individuals and small businesses in the Chicago area.
Disclaimer: Any accounting, business or tax advice contained in this article, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. If desired, I would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired consultation services.