IRS Taxes: If You Owe A Lot More Than You Can Pay, You May Qualify For The "Offer In Compromise" Program To Erase Your Debt
Richard Fonfrias, J.D.
Chicago’s Financial Rescue & Bankruptcy Lawyer
Fonfrias Law Group, LLC
The Internal Revenue Service (IRS) offers a program called Offer In Compromise (OIC), which allows taxpayers who owe taxes to negotiate an amount less than they owe to erase their debt.
You use Form 656 to see whether you qualify for the OIC program. The purpose of this program is to eliminate the debt when it’s in the interests of the IRS and the taxpayer. Plus, it helps the taxpayer get back on track with future requirements.
How To Qualify
You must meet at least one of the following conditions for the IRS to consider you for an OIC:
- A Question About Liability: You must show a reasonable doubt that the tax liability is correct.
- A Question About Collectability: You must show that the tax isn’t likely collectable in the future.
- An Economic Hardship: You must show that collecting the tax would “create an economic hardship or would be unfair and inequitable” to you.
Any taxpayer may use the OIC program; in practice, it is most often used by persons who are elderly, disabled or have experienced special circumstances.
A Question About Liability
To argue this point of view, you need to establish that you have had no other way to challenge this tax assessment. If IRS shows that you received notices of your liability and did not respond, or that you did not challenge the tax during an audit, then you will not be allowed to challenge the liability.
A Question About Collectability
To argue this point of view, you need to show that you will never have the ability to completely pay the tax bill you owe. IRS uses this formula when considering your OIC:
– Monthly Disposable Income (Multiplied By) The Number of Months (Plus) The Net Realizable Equity in Your Assets = The Settlement Amount
– Disposable Income: This is your monthly income less allowable monthly expenses. IRS will not allow you to deduct college tuition for a dependent and credit card payments because they are unsecured debt.
– Number of Months: This is whichever is smaller – the number of months remaining until the Collection Statute Expiration Date for the tax debt OR either 6 or 24 months, depending on the option you selected for the OIC.
– Net Realizable Equity in Your Assets: This is the quick sale value of an asset, usually 80% of its fair market value minus any liabilities it secures.
– If you believe you qualify, then you complete a financial statement on a form given to you by the IRS.
An Economic Hardship
To argue this point of view, you must show that collecting the tax would “create an economic hardship or would be unfair and inequitable” OR “where compelling public policy or equity considerations identified by the taxpayer provide a sufficient basis for accepting less than full payment.
Which Tax Liabilities Are Eligible For OIC?
Any federal tax liability under the Internal Revenue Code is eligible for an Offer in Compromise. This include all business and personal taxes.
You can use an OIC only for taxes that have already been assessed. Your income tax is considered to be assessed (1) on the date the income tax return is due (April 15th), or (2) if the income tax return is filed after the due date, then on the date the tax return is received.
Advance Fee Required
IRS now requires that you submit a 20% advance, non-refundable fee plus $186 (US) with your OIC for lump-sum cash offers. If you submit your offer without the required fees, it will be rejected. The IRS has two years to decide whether to accept your OIC. And if it has not decided within that time period, then your offer is automatically accepted.
If you wish to make payments on your OIC, such as by the month, then you must send along with the offer your payment for the first month. (You are not required to send the 20% advance fee.) Then, while IRS is considering your offer, you must continue to make monthly payments. If you don’t keep your payments current, then your offer will be returned to you.
If you are a low-income taxpayer, you may be exempt from both the application fee and the advance fee or monthly payments. You should look over Form 656A to see whether these fees and payments apply to you.
How Does An OIC Affect An IRS Lien Or Levy
An OIC has no effect on a tax lien. The tax lien remains on your property until the OIC is accepted by the IRS. Once the full amount of the offer has been paid, then IRS will remove the lien from your property. If it doesn’t remove the lien, then you should request that it do so.
An OIC does, however, stop tax levies, under the U.S. Federal Tax Regulations. It states that IRS will not levy on your property while it is considering or processing an OIC. And if the OIC is rejected, then it won’t levy on your property for 30 days after the rejection. Further, if you appeal the rejection, then IRS cannot levy during the appeals process. However, a levy is not automatically released if it is on the property when you submit your OIC.
Warning To Consumers
You may see advertising from companies offering to settle your taxes with the IRS for pennies on the dollar through the OIC program. These companies usually charge very high fees and then the consumers often learn they are not eligible for the program. Make sure you check with the Better Business Bureau or other reporting agencies before you contact firms who offer to resolve tax problems. And, as always, you’re welcome to call me. 312-969-0730.