An Offer in Compromise is an agreement between the IRS or state taxing authority and the taxpayer that settles a tax liability for payment of less than the full amount owed. This is a great tool for resolving debts that are not affordable to pay off.
Each state taxing authority has its own policy on whether or not they will consider a settlement proposal from a taxpayer and what the procedures are for submitting one. If applicable, we will consider a settlement as a means for resolving a client's state tax debts.
When dealing with the IRS, before an OIC can be submitted, a taxpayer must:
- be in full tax-filing compliance for all tax types;
- be current with estimated tax payments for the current year; and
- have been current with federal payroll tax deposits for the past six months.
The IRS will return any taxpayer's OIC that doesn't meet these criteria without further consideration of the settlement proposal.
There are three different types of settlements that can be proposed under the OIC program:
- Doubt as to Liability - This means that doubt exists that the tax amount assessed is correct or is assessed against the proper taxpayer(s).
- Doubt as to Collectibility- Doubt exists that the taxpayer has the means to ever pay off the full amount owed. The IRS considers current equities in all types of assets, current and/or future monthly cash flow above and beyond basic necessities, and equities from assets that were sold in the past and the proceeds used for purposes other than payment of taxes in the past (dissipated assets).
- Effective Tax Administration- The taxpayer owes the taxes and could pay, but payment may create a unique hardship to the taxpayer or to someone else, such as employees, relatives, etc.
The most common type of OIC is the doubt as to collectibility version. Typically, the formula used by IRS to determine the acceptable amount of an OIC is as follows:
ACCEPTABLE OIC AMOUNT = REALIZABLE VALUE OF ASSETS + (MO. CASH FLOW AFTER EXPENSES x 48 TO 120 MONTHS)
If accepted, payment terms for an Offer in Compromise can be in one of three methods: cash (typically within 90 days of acceptance), short-term deferred payment (paid within 24 months of acceptance), or a long-term deferred payment plan (payment plans extending up to 10 years in length).
There are other indirect benefits of submitting an offer-in-compromise. While an OIC is being considered, the IRS must stop their collection action, including levying (garnishing) any assets or wages. This can be a useful tool for a taxpayer who is being pursued by IRS so long as the OIC is reasonable to propose.
BE CAREFUL, DON'T PAY A LARGE FEE IN ADVANCE BASED ON FALSE PROMISES!
In recently published statistics, less than 25% of OICs submitted to the IRS are actually accepted when filed. This figure has been even lower in past years. The remainder are either returned, withdrawn or rejected. So, it is important to be sure that a taxpayer truly qualifies for the OIC program before spending all the time and effort to submit one. We have witnessed other companies misrepresenting the chances or likelihood of a successful OIC on purpose in order to trick a person into paying a large up-front fee for an OIC filing. This type of activity generally results in those companies having low ratings with the Better Business Bureau and/or having lots of complaints listed against them with state Attorney General's offices and/or out on the internet. At Burkhart, Peterson & Company, we'll only submit an OIC if it is likely to be accepted and if there are no other obvious solutions to a problem that are quicker and/or more efficient. This approach to the OIC program creates a significantly increased historical acceptance rate for our firm above what the published success rate is.
If you don't really owe your taxes, owe more than you can afford to pay, or have the capability to pay, but would suffer a hardship if you remitted payment, then you may be a good candidate for an OIC. If so, contact our office to discuss your case and to start the process of resolving your tax problems.