Understanding Offers in Compromise and Important Steps to Consider
Almost one in four Americans owes the IRS some amount of back taxes.
When hard times coincide with tax season, many people fall into arrears.
While many see these debts as non-negotiable, the IRS can come to the negotiating table the same way any other lender can.
If you’ve fallen into a pit of debt that seems inescapable, you can find a rope to climb out.
Accountants call those ropes offers in compromise.
Want to know more about how to escape those inescapable debts? Keep reading.
What Are Offers in Compromise (OIC)?
An offer in compromise (OIC) represents an admission that you can’t pay the tax debts you owe but want to settle your accounts with the IRS.
You file multiple forms with the IRS stating that you cannot pay but offer a partial payment.
If the IRS feels that it cannot collect more from you in a reasonable time frame, it will accept the offer in compromise and consider the matter settled.
Offer in Compromise Requirements
To make an offer in compromise, you must meet the IRS’s requirements.
Note that the IRS expects you to exhaust other potential payment options, such as installment agreements first, rather than go straight to an offer in compromise.
You must have filed all tax returns and made all estimated payments, and cannot be party to an active bankruptcy proceeding.
If you file an offer in compromise for a business, you must have made tax deposits for the current and previous two quarters.
If you want to file an offer in compromise for the current year, you must also have a valid extension.
You must also continue making installment plan payments you’ve already arranged and send an initial tax payment.
The size of this payment varies depending on whether you pay a lump sum or make periodic payments.
The offer in compromise also requires the payment of a fee.
As of this writing, that fee sits at $205.
More Fees and Payments?
While the non-refundable fee intimidates some taxpayers, that money goes toward your tax debt.
You can even specify a year or other debt for the money to apply to if you have multiple years of owed taxes.
Can’t Meet Those Requirements?
If you find yourself in arrears, you may not have the funds to handle some of the offer in compromise qualifications.
Your resources may have already reached their limits when hiring a tax professional to help you with the process.
You may also have other debts, such as gambling debts or credit cards, piling up.
Those who meet IRS low-income certification guidelines do not need to pay the fee or send the initial payment.
Consider pursuing this if your reason for not paying relates to a lost job.
Buying Time
While the IRS evaluates your offer, it puts other collection activities on pause.
You still need to make all relevant payments, but if you feel overwhelmed by creditors seeking funds, this can serve as a welcome reprieve.
The IRS can take time to evaluate these offers.
If it takes more than two years for the IRS to decide, not including any appeals, it accepts your proposal.
When Do Tax Liens Go Away?
Any federal tax liens related to your debt will go away when the IRS receives payment of your full offer.
Any legal judgments related to these debts must wait for tax debt resolution.
Personal and Business Tax
If you own or operate a business, you can pursue offers in compromise for both of these at the same time.
You must submit separate forms for your personal debts and each business whose accounts you wish to settle.
You must submit Form 433-A for any personal tax debt you wish to address and Form 433-B for each business.
Both personal and business tax debts use Form 656, but you must submit a different Form 656 for each such debt.
You will also need to send any required initial payments for each Form 656.
They Said No
The IRS often denies offer-in-compromise requests.
Don’t consider this denial the end of your journey toward IRS tax relief, though.
You can appeal this decision if you feel the IRS has overlooked something or acted unfairly.
The easiest way to request an Appeals conference involves submitting Form 13711.
If you prefer letters to forms, you can submit a letter instead, but it requires the same information.
During this process, you’ll point out areas where you disagree with the IRS’s reasoning.
You will need to provide evidence to support these claims.
If applicable, you can also submit new information that the IRS didn’t consider during your initial application.
At the end of the application, you’ll certify that, to the best of your knowledge, all information in the appeal is true, correct, and complete.
Do I Need To Hire Professional Assistance?
When pursuing an Offer in Compromise (OIC) with the IRS you have several options.
While lawyers bring valuable expertise, particularly in complex cases with legal implications, their services can be expensive.
In addition, you can leverage the professional expertise of a CPA who specializes or has the experience required for these cases.
Alternatively, an Enrolled Agent (EA) can provide effective representation at a more affordable rate.
EAs are tax professionals who are enrolled to represent tax payers before the IRS.
They specialize in tax matters like OICs, offering a cost-effective and efficient choice.
While legal counsel may be necessary for complex situations, for many taxpayers, working with an EA or CPA is a practical and budget-friendly solution.
What About State Tax?
While these rules apply to IRS tax relief, you can also reduce tax liabilities at the state level through an offer in compromise.
In Arizona, the responsibility for handling such requests falls to the Arizona Department of Revenue.
The requirements for Arizona state tax relief list several conditions, and those who meet any two of those conditions can apply for tax debt relief.
If you apply for federal relief, the Arizona Department of Revenue will want a copy of your agreement with the IRS as well.
Keep thorough documentation of all communication with both the state and federal departments.
At Master Accounting & Tax Service our EA can help with tax issues in all 50 states, not just with the IRS.
Accounts Settled
Offers in compromise have saved many taxpayers from hardship and heartbreak.
While the IRS doesn’t accept every offer it receives, it takes a realistic view of how much money it can collect from someone dealing with a major hardship.
If you want to improve your chances of approval, work with a tax attorney to put together the best application possible.
Master Accounting & Tax Service would like to help you with an offer in compromise or any other tax issue.
We have more than two decades of experience in tax, payroll and bookkeeping services.
In addition, we have an Enrolled Agent on staff to specifically assist with matters related to offers in compromise.
If you want tax accountant services from a provider with an A+ Better Business Bureau rating, give us a call at (480) 456-4999 or send us an email.
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