Tax debt in the US? Offer in compromise may be a viable option
When it comes to owing back taxes, an Offer In Compromise (OIC) may be the way to go. An OIC is a legal agreement between you and the Internal Revenue Service (IRS) that allows for resolving an unpaid tax liability by paying less than what the IRS claims are due or eliminating the debt. While this sounds attractive on paper, understanding when and how much to offer can be quite tricky.
If done improperly, your offer may even end up getting rejected by the IRS, leaving you in financial limbo. That’s why any individual looking into this option must know all aspects of offers in compromise before making them; so they can better understand eligibility requirements as well as other important details such as how much they should offer and whether their best interest will be served through opting for an OIC rather than simply declaring bankruptcy to get out of uncollected debts. Read on if you’re interested in learning more about potentially lowering your tax liabilities through an offer in compromise!
What is an offer in compromise and how does it work?
An Offer in Compromise is an fresh start initiative created by the IRS that entails an agreement between a taxpayer and the U.S. Internal Revenue Service (IRS) to accept less than the amount owed on taxes. This type of arrangement is made when the taxpayer can demonstrate that they cannot realistically pay the full amount due. Generally, this involves showing proof that settling for a lesser amount would be equitable to both parties—the IRS needs to ensure they will receive some compensation while the taxpayer needs to know they won’t be facing financial ruin if they accept the offer.
To begin the process, one must fill out and submit Form 656-Offer in Compromise (OIC) which provides documentation of their financial situation and outlines their proposal for resolving the debt. If accepted, an agreement would be outlined that specifies repayment terms, typically spread out over several months or less. The agreement is binding and any failure to meet its obligations may result in further actions from the IRS or cancellation of eligibility for future OICs. Taking advantage of an Offer in Compromise can provide a capable path forward for taxpayers struggling with overwhelming tax debts affecting their finances.
How much should I offer the IRS?
One of the most daunting challenges that taxpayers face when submitting an offer in compromise is determining the appropriate amount to offer the IRS. Although the ultimate goal is to settle your tax debt for as little as possible, it’s important to avoid low balling your offer and risking its rejection. However, since each case is unique and there’s no one-size-fits-all approach, determining the ideal offer amount usually requires a great deal of experience and skill.
If you’re submitting an offer in compromise because you’re unable to afford the tax debt, your offer amount must exceed your reasonable collection potential (RCP), which is an estimate of your ability to pay the tax. The RCP is calculated by assessing your current and projected income, assets, and expenses. The IRS considers several factors when determining RCP, including your earnings potential, living expenses, and any equity in assets.
It’s important to note that if you’re submitting an offer in compromise based on doubt as to liability or effective tax administration, the RCP doesn’t apply, and the IRS will consider other factors when assessing your offer amount. For doubt as to liability cases, the offer amount may be based on the taxpayer’s ability to pay, while effective tax administration cases may factor in extenuating circumstances that prevent the taxpayer from paying the debt in full.
To determine the appropriate offer amount, it’s important to work with a tax professional who is experienced in submitting successful offers in compromise. They can review your financial situation, assess your RCP, and help you determine a reasonable offer amount. Keep in mind that even if your offer is accepted, you’ll still need to meet the terms of the agreement, which may include making timely payments and complying with all tax-filing requirements.
Tips for making an accurate offer amount to the IRS
Making an accurate offer amount to the IRS can be daunting, but there are several tips that can help:
1. Gather as much financial information as possible. To make an accurate offer, the IRS needs to know your total income, assets, liabilities, and living expenses. Having complete and up-to-date records will help you create an accurate representation of your current financial situation.
2. Consult with a tax professional. An experienced tax professional can review your financial information and help you create an offer that accurately reflects your ability to pay.
3. Be realistic in your assessment of the RCP. Your offer should reflect your financial capacity and not just what you want to pay. Making a low ball offer may result in its rejection, so it’s important to be honest about your financial situation.
4. Be prepared to pay with your offer. The IRS may accept an offer even if you are unable to pay the total amount immediately, but making a partial payment will demonstrate your commitment and increase the chances of its acceptance.
Making an accurate Offer in Compromise can provide critical relief for taxpayers struggling with overwhelming tax debts and help them get back on the path to financial stability. If you’re considering submitting an offer, it’s important to understand your rights and obligations, seek professional advice from a qualified tax expert, and follow the payment instructions provided by the IRS. By taking all of these steps, you can increase your chances of success when negotiating with the IRS.
Final thoughts
Submitting an Offer in Compromise to the IRS can be a complex process, and it’s important for taxpayers to understand their rights, obligations, and payment requirements. Working with a qualified tax professional can help you make an accurate offer amount and increase your chances of having it accepted by the IRS. The best way to ensure success when submitting an Offer in Compromise is to be prepared, honest, and realistic about your financial situation. Taking all of these steps can help you achieve a successful resolution with the IRS and get back on the path to financial stability.
