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IRS Offer-in-Compromise: How To Reduce Your Tax Debt

IRS Offer-in-Compromise: How To Reduce Your Tax Debt

Sometimes it is possible to cancel your tax return with a huge reduction. If you qualify for something known as an offer in compromise, known as an "OIC" or "Offer," the Internal Revenue Service will accept less than the taxpayer amount owed in an account tax and pay it.

There is no legal right for the IRS to reduce a valid tax bill; it is entirely a matter of government appreciation. However, in almost all cases, the IRS must give due attention to the properly filed OIC. In recent years, up to 40% of submitted OICs have been accepted by the IRS, a relatively high percentage compared to previous years.


What is an Offer in Compromise?

An IRS Offer, or OIC, is one way for taxpayers to find relief if they cannot pay their unpaid tax debts. You can provide the IRS with a reasonable payment plan, and you can pay less than you really should.

An offer in compromise isn't the only way to pay off your tax debt, and in many cases, it's the last resort. Continue to see if an offer-in-compromise is a good solution to your tax problems or call experienced attorneys for proper advice.


OIC Requirements

The requirements of an Offer are strict. The IRS only accepts about 40% of OIC requests, based on recent data. There are three reasons why the IRS will consider your offer in a deal:

  • Doubt as to Collectibility: If you can't pay the entire bill, you can send this type of OIC.

  • Doubt as to Liability: You can open this type of OIC when there is good reason to believe that you do not owe the full amount that the IRS is trying to collect.

  • Efficient Tax Administration: If you can pay the amount owed but have extreme mitigating circumstances for not doing so, you can register for this OIC. If paying income tax in full can cause "financial hardship," as defined by the IRS, you may take advantage of this option.

Regardless of the applicable situation, you will need to provide substantial evidence of your claims when submitting your offer. You will also need to meet these standard OIC requirements:

  • Don't go bankrupt. If you or your business goes bankrupt, the IRS will reject your offer.

  • You are not subject to an audit. You will not qualify for an OIC if you have an open audit investigation or an innocent spouse complaint with the IRS.

  • You have made payments for your tax debt. The Internal Revenue Service will not consider your offer if you have not made the estimated required payments during the current fiscal year. Suspending monthly or quarterly payments while awaiting acceptance of an offer will not put you on the right side of the IRS.

  • You have submitted all the necessary tax returns. Otherwise, you must return and send the unpaid charges before sending the OIC.

  • Your case has not been referred to the Department of Justice. If the IRS finds tax evasion evidence, it will refer your case to the Department of Justice to recommend prosecution. If your case is already with the Department Of Justice, it is too late in submitting an offer of compromise, but you can call a tax lawyer to find out how they can help you.


How much should I Offer in an Offer In Compromise?

Now here is the million-dollar question. An Offer must be equal to or greater than what the IRS considers "your reasonable collection potential" - in other words, what the IRS believes it can get from you during the 10-year collection period. 

Your billing potential is calculated using a standard formula, and the IRS will not accept small offers.

The formula for "reasonable collection potential" is simple: monthly income (and future monthly income) minus qualifying expenses multiplied by the number of months the IRS has to collect the debt. Income includes wages and all valuables you own - your house, car, furniture, and even your artwork and jewelry. 

If your reasonable billing potential is less than your tax bill, your Offer will likely be accepted. However, the difference between what you and the agency consider "reasonable and allowable living expenses" can be huge.


How to calculate eligible living expenses for an IRS Offer in Compromise

The IRS does nothing concerning calculating qualifying expenses. The agency sets strict limits on the amount you can charge for these common categories of expenses:

  • Car Operating Costs (gas, insurance, and maintenance): This limit depends on your location, but is typically around $ 200-300 monthly for a single car. 

  • Food, Entertainment, Clothing, and Personal Care: No matter where you live, the IRS has a standard limit per person, depending on the number of people in your home.

  • Housing Costs: The allowable limit on housing costs (including rent or mortgage and all utilities) is based on the county and the number of people in the household.

  • Monthly Medical Expenses: The IRS automatically awards $ 52 per month for each family member with no questions (or $ 114 per month for any member age 65 and over). You can increase this limit with the supporting documents from your doctor.

  • Payments by Car or Public Transport: the limit is standard, no matter where you live. As of March 2020, that figure was $ 508 per month for a single car or $ 217 per month for public transportation.

The IRS's limits on eligible living expenses are generally much lower than what taxpayers spend.


How to File an IRS OIC

To file an OIC with the IRS, you must:

Submit payment terms using Form 656

Form 433-A provides a detailed picture of your daily income and expenses, along with supporting documents for your numbers.

Pay the $186 fee to submit the request: You do not have to pay these fees if you file an OIC liability claim, and you can also forgo the commission if you follow the IRS guidelines for low income.

Make the first payment for your offer. There are two payment options:

Lump-Sum: include 20% or more of the offer. If the IRS accepts your offer, you will have to pay the remaining balance in 5 payments or less from the date of acceptance.

  • Periodic payment: include your first payment in the OIC request and pay the remaining balance within 6-24 months (depending on the terms of your offer) from the time you submit your request. You will be required to continue making these payments while the IRS processes your offer, or it will be rejected.

  • Whether or not the OIC is accepted, these payments and your application fee of  $186 will apply to your tax debt.

If the Internal Rev rejects your offer, you can try again, but you will need to pay the registration fee and upfront payment each time you register. Make sure you hire a professional and understand them the first time.


What happens if my OIC is accepted?

If the Internal Revenue Services accepts your offer, you will need to stick to the payment plan provided. Otherwise, Uncle Sam can sue you to collect the initial debt plus interest and penalties. That is why you should carefully calculate the OIC value with the help of an experienced lawyer.

You should also continue to file your tax return on time and pay all future tax bills for the next five years. If you do not do this at any time during the five years, the IRS will revoke your OIC agreement.


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