Many times, citizens find themselves in a financial quandary and have to cut corners on the debts that they will repay. If you are faced with this dilemma and cannot afford to pay the Internal Revenue Service, consider submitting an Offer in Compromise.
“An Offer in Compromise is an agreement between a taxpayer and the IRS that resolves the taxpayer’s liability. The IRS has the authority to settle or compromise the federal liabilities by accepting less than full payment under certain circumstances,” says William Coleman, a member of the National Association of Black Accountants and president of Coleman and Williams Ltd.
According to Stand Up to the IRS (Nolo Press; $29.99), the IRS will consider an Offer in Compromise for only three reasons:
- Doubt as to liability: the taxpayer does not believe they owe this amount.
- Doubt as to collectibility: the taxpayer cannot afford to pay the amount.
- Effective tax administration: the taxpayer agrees with the amount owed and has the resources to pay but believes it would cause economic hardship or is unfair and inequitable.
The IRS has allowed some taxpayers to settle their debt for as little as 1% of what they owe. This is an official program of the IRS and the agency will fully investigate your ability to pay.
“Offers in Compromise mutually benefit the taxpayer and the IRS. The taxpayer that owes a great deal of money, typically over $10,000, will not have a tax lien on their assets or property, which will affect their credit,” says Fredrick W. Daily, tax attorney and author of Stand Up to the IRS and Tax Savvy for Small Business (Nolo Press; $36.99). “From a government standpoint, they can get the debt off their books without having to take a lot of time and resources to collect the taxes.”
This may sound like the deal of the century, but submitting an Offer in Compromise and essentially playing Let’s Make a Deal with the IRS is a very formal, intensive, and time-consuming process. It is not simple to do. Recent IRS data indicates the current rate of acceptance has dropped dramatically in the past year or two. “The IRS accepts many offers from tax debtors, if they are properly submitted and documentation is provided,” Daily says. “But the majority of offers are rejected because the taxpayer doesn’t bother to learn the rules.”
Since the IRS requires full disclosure, the government has the opportunity to find out every single detail of your family’s finances. You will be required to submit forms 656, 433-A, and 433-B, if applicable. Documentation required includes deeds and mortgages to all real estate, bank statements for up to 12 months, life insurance policies, sources of nonwage income, unpaid bills, evidence of major living expenses, and doctor’s statements.
“You have the right to ask and have the IRS consider your Offer in Compromise. But it is completely d
iscretionary on the part of the IRS as to whether or not they will accept it,” says Daily. “It is a slow process. The more you owe, the longer you can expect the government to process your application. It is not unusual for the IRS to take a year or more. If the IRS accepts your offer or you accept its counteroffer, all interest and penalties are included and the debt is wiped out.”The IRS will only consider an Offer in Compromise after all other payment options have been exhausted. “A taxpayer owing federal taxes should first look at ways to pay the liability in full. Perhaps the taxpayer can borrow money by refinancing their home or obtaining a loan from a financial institution,” says Michael McDermitt, national program manager of the Offer in Compromise Program for the IRS. “Other options include liquidating assets such as stocks or bonds, cash advances on credit cards, borrowing against 401(k)s or life insurance policies, or borrowing against equity in other assets.”
The IRS encourages the taxpayer to pay as much of the bill as possible to reduce the amount of penalties and interest owed. Depending on the circumstances, individuals may qualify for an extension of time to pay. The taxpayer can request an extension from 30 to 120 days.
Finally, before an Offer in Compromise will be considered, the last alternative would be an installment agreement. For taxpayers owing $25,000 or less in taxes, Form 9465 needs to be completed. For those owing more than $25,000, Form 9465 and Form 433-F are required. To secure the government’s interest in the
individual’s real or personal property until after the final payment has been made, the IRS may file a Notice of Federal Tax Lien. This, of course, can negatively affect one’s credit score. Once the taxpayer has exhausted all these options, an Offer in Compromise will be considered.When applying for an Offer in Compromise, a $150 application fee must be paid, all federal tax returns must be filed, employment tax returns must be filed and paid on time for the prior two quarters, and you must not be a debtor in a bankruptcy case. In some cases, it is possible to have the $150 application fee waived. Taxpayers may be exempt from paying the application fee if they meet one of two criteria: the Offer in Compromise is submitted based solely on doubt as to liability or the taxpayer’s total monthly income falls at or below income levels based on the Department of Health and Human Services poverty guidelines. Taxpayers meeting this criteria must submit Form 656-A, Offer in Compromise Application Fee Instructions and Certification.
The IRS absolutely will not negotiate a tax bill with you unless all of your tax returns have been filed. Also, if you have filed for an extension, your offer is not likely to be considered until the return on the extension is filed. According to the IRS, a taxpayer should be able to prepare the Offer in Compromise packet on their own by being “patient and thorough” in completing the application. The agency attempts to have these packets completed within six to nine months. If the taxpayer owns significant assets and has other complex issues, it may take longer to investigate.
If your offer is rejected, the IRS will notify you by mail. You have the right to appeal the decision within 30 days from the date of the letter. You can then submit another offer with an additional $150 application fee. “A taxpayer must increase an offer the IRS rejected as being too low when the taxpayer’s financial situation remains unchanged,” says McDermitt. “There is no set offer amount the IRS accepts. The IRS reviews each offer and makes its determination based on the facts and circumstances of each taxpayer.”
“When an Offer in Compromise is accepted, the taxpayer is required to comply with all provisions of the IRS code relating to filing and paying taxes for five consecutive years or until the offered amount is paid in full–whichever is longer,” says Coleman. “Within the first five years, the taxpayer cannot apply for another Offer in Compromise. However, after the first five years, should there be a need to apply, the taxpayer can.”
To find out more about Offers in Compromise, go to the IRS Website at www.irs.gov and search Publications 594 and 656, speak with a tax professional or certified public accountant, and read Stand Up to the IRS. The book contains actual tax forms as well as additional tips for settling your tax debts.