Ultimate Guide to IRS Offers in Compromise in Ventura County
If the Internal Revenue Service tells you that you owe taxes, there are many ways in which you can handle your debt.
While many can benefit from payment options, taxpayers whose tax debts are so high that they cannot pay with their income and ability to pay may not find that these types of solutions are appropriate for them.
If you owe the IRS money but can’t repay it, you might benefit from another program called an Offer in Compromise.
What is an Offer in Compromise?
The IRS Offer in Compromise is a program through which the IRS allows taxpayers to settle their tax liabilities for less than what they owe. The authority to accept less than what is owed is granted by 26 U.S. Code § 7122. Under this statute, taxpayers can submit lump-sum offers in compromise to settle their tax debts through a lump-sum payment or periodic payment offers in compromise to settle their liabilities over a fixed number of periodic payments.
When a taxpayer offers the IRS a lump sum, he or she will be required to include a first payment with the offer. People who submit periodic payment offers in compromise must submit the amount of the initial periodic payment with their offers.
Under IRM 5.8.When the IRS deems the tax liability to be otherwise uncollectible, it will accept an Offer in Compromise. It may also agree to an Offer in Compromise when there is doubt about the liability owed and to support the effective administration of taxes. The goal of the OIC program is to negotiate a legal payment agreement between the taxpayers and the IRS that is in both parties’ best interest.
I have had a lot of luck with offers in compromise in Ventura and Santa Barbara counties.
Doubt about collectibility
When the IRS doubts it can collect the tax debt since the taxpayer’s financial status prevents them from paying the full amount owed, an offer of compromise may be approved. When a taxpayer’s income and assets are not enough to satisfy their tax liability, doubt can be created about the taxes being able to be collected.
This is the most common reason to make an Offer in Compromise. A lot of people who have tax debts that can’t be collected can settle them with an offer in compromise.IRS 7122(d)(3)(A) says they can’t deny an Offer in Compromise if they’re just concerned with how much you offer.
Under IRS Policy Statement P-5-100, the agency will accept an Offer in Compromise that is based on doubt about collectability when the IRS determines that it is unlikely that it will be able to collect the tax debt in full.
The amount that the taxpayer offers has to be more than what the IRS thinks it can collect through judicial or administrative proceedings.
The amount that the IRS believes is collectible is called the reasonable collection potential. The IRS analyzes the basic living expenses of the taxpayer in order to calculate the RCP.
Under certain circumstances, the agency may accept a lower offer than the RCP, but this is rare.
How much should I offer in compromise to the IRS?
The Offer in Compromise was designed to help taxpayers who are unable to pay their taxes without suffering financial hardship.
IRS offer in compromise stats are interesting. In 2019, the IRS received 54,225 offers in compromise and accepted 17,890. The total value of the accepted offers was $289,422,000.
This shows that Offers in Compromise can be a good answer for many taxpayers, but it’s also helpful to note that the IRS rejected more offers than it accepted, with an overall total of 36,335 denied offers.
These IRS Offer in Compromise statistics demonstrate the importance of analyzing an Offer in Compromise before determining the answer to “How much should I Offer in Compromise to the IRS?”
If you have a large tax liability, you will need to show that you can’t pay it, you don’t owe it, or you have a special circumstance that makes acceptance of the offer in the taxpayer’s and the IRS’s best interests.
An IRS offer is more likely to be accepted when it is the maximum amount of money that the IRS could reasonably expect to collect within a reasonable period. To determine whether the OIC program is right for you, you need to be aware of the eligibility requirements.
Eligibility requirements for an Offer in Compromise in Ventura and Santa Barbara
A taxpayer must meet all of the following requirements to be eligible for the OIC program:
- Has no unfiled tax returns
- Has been billed for one or more tax debts that are included in the offer
- Makes current estimated tax payments
- For business owners with employees, makes current quarterly tax deposits
IRS will also look at several factors when determining whether a taxpayer would face financial hardship if forced to pay the full amount owed. Those factors include income, assets, expenses, and lifestyle.
If you have big assets, you are unlikely to get an offer in compromise if you claim you can’t pay, for example.
When a taxpayer submits an Offer in Compromise to the IRS, he or she will be required to complete and submit IRS Form 656, IRS Form 433-A, and/or IRS Form 433-B for businesses.
In addition to the data on Form 433 and the IRS’s examination of the claim, the IRS’s employees also conduct investigations. Any unusually high living expenses will have to be justified by special circumstances.
Nevertheless, the IRS will not necessarily require you to sell your home or car to satisfy your tax debt. If you’re living a luxury lifestyle, installment agreements might be a better choice than an Offer in Compromise.
Calculating the reasonable collection potential
If you meet the eligibility requirements and appear to qualify for the OIC program, you will want to calculate the reasonable collection potential to determine the amount that should be offered. IRM 188.8.131.52.1 provides guidance about how the IRS calculates the RCP for a taxpayer’s Offer in Compromise.
To figure out your net equity, you’ll have to figure out your assets’ net equity. You’ll then get that amount added to your future earnings. To figure out net realizable equity, you’ll have to determine the fair market value of different types of property. Then, you’ll deduct any loans secured against the property and apply any discounts from a quick sale to the property. This step may require you to hire an appraiser to figure out the property’s fair market value.
To calculate your future income, you will need to complete Section 7 of Form 433-A. Here you’ll put your income and your living expenses. You might claim expenses the IRS won’t normally accept. The IRS relies on national and local standards when it calculates the RCP. After applying the standards, the sum remaining after subtracting expenses from your income is called remaining income.
For a lump sum offer, you multiply remaining income by 12. For a periodic payment offer, you multiply remaining income by 24. This number is then added your asset number to arrive at your minimum offer amount.
Steps in the OIC process
The IRS rules that govern the Offer in Compromise process are critical to understanding the process. To begin with, all tax liabilities must be included in your Offer in Compromise.
1. Prepare and submit any unfiled returns.
This might mean preparing any unfiled tax returns and filing them so the full amount owed is known. If there are any trust fund recovery penalties or withholding taxes at issue, you will also need to complete assessments for every quarter which you may be liable for. Before an offer can be accepted, unfiled tax returns must be filed. Otherwise, the IRS won’t accept the offer.
2. Prepare and submit the right IRS Offer in Compromise form.
Submitting an Offer in Compromise requires you to use the correct IRS Offer in Compromise form. You will need to submit IRS Form 656 together with Form 433-A. If you’re a business owner, you may additionally need to submit Form 433-B. IRS Publication 1854 contains information about how these forms should be completed.
3. Choose a lump-sum or deferred payment offer.
The IRS prefers that taxpayers make lump-sum cash offers.If you don’t have enough money to pay it all at once, the IRS may let you do a payment plan. Under IRM 184.108.40.206, making a cash offer means paying the offer within five payments after you receive notification that the IRS has accepted the offer. A deposit with a lump-sum Offer in Compromise is not mandatory, but it is highly recommended.
Deferred or periodic payments include those whenever the taxpayer offers to pay some portion of the money more than six months after the offer is accepted. In most cases, deferred payment offers are not extended more than two years after acceptance.
If you submit an acceptable offer that will be paid back by two years or less, it shouldn’t be rejected unless there’s a valid reason for shortening the repayment period. If you need to make a deferred payment offer, it’s term should be clearly stated.
After the IRS receives the Offer in Compromise
After you submit an Offer in Compromise, the IRS Revenue Officer will do a screening to see whether or not it can be processed. The IRS sends back many offers that can’t be processed, which can be frustrating. Under IRM 220.127.116.11, the following circumstances will result in a determination that an offer is unprocessable:
- Lack of an offer amount
- Unidentified taxpayer
- Unidentified liabilities
- Missing signatures
- Failure to submit financial statements
- Net equity is not reasonably reflected in the offer
- Use of an old Form 656
- Altered or deleted terms
If an Offer in Compromise is returned because it is unprocessable, the taxpayer will not be able to file an appeal with the IRS Appeals Office. However, there is a process for correcting a deficient or incomplete offer package.
If an offer is determined to be processable, it will be forwarded to an Offer Examiner. The assigned examiner reviews all of the submissions line-by-line, looking for red flags.
The taxpayer’s financial circumstances will also be examined.If the offer is accepted, you’ll get notified. If the taxpayer doesn’t honor his or her offer within the specified timeframe, the offer will be retracted.
What is the effect of an OIC acceptance?
When the IRS agrees to an Offer in Compromise, a contract forms between the taxpayer and the IRS. Now the IRS can’t inquire any further about the matters included in the offer.
Unless a mutual mistake or fraud led to the contract, both parties will be denied any attempt to recover any of the consideration that was given.
However, an offer that was accepted as a result of mutual mistake as to a material fact or as a result of false representations about a material fact can be revoked.
An accepted Offer in Compromise will include the IRS’s agreement to accept the offer as a full settlement of the taxpayer’s liability.
It will also include the taxpayer’s agreement to pay the offered amount and the IRS’s release of liens that have been filed. Other promises are included in an accepted Offer in Compromise, including the promise to remain in compliance with the tax laws for the subsequent five years.
That taxpayer will also agree to offset any refunds due for the current or previous years. If the taxpayer gets a tax refund during the year the offer is accepted, he or she needs to return it. If he or she doesn’t do that, the offer may be retroactively rejected and the tax bill reinstated.
When an Offer in Compromise is rejected, what are your options?
If a taxpayer’s offer is accepted, but the offer is rejected after an investigation, they can request an independent review. IRS Appeals Office conducts this review. The IRS will let you know about an independent review when an offer is rejected.
The taxpayer has 30 days to file a written protest of the IRS’ decision. This written protest can be sent on Form 13711. You can include new information with the written protest for the examiner’s consideration. However, the case file and protests are often just sent to the Appeals Office.
Under IRM 8.23.4, examiners also prepare Form 1271, which is a rejection memorandum. It includes a narrative report that details why the Offer in Compromise was rejected.If the narrative is about doubts about collectability, it will include specifics about reasonable amounts and terms. This can be used as a basis for negotiations during an appeal.
You won’t get this form automatically. However, if it’s needed for an appeal or to create a new offer, you might try to get your hands on a copy either by asking the offer examiner directly for a copy or by making a request under the Freedom of Information Act.
When you file your appeal, you must include the specific grounds. You will need to compare your Form 433-A with the income and expense and asset tables. Please include supporting documents for any disagreements you list.
If your case qualifies, an appeals conference will be scheduled. This conference is informal, and is handled by correspondence, phone, or in-person meetings. The appeals office focuses on settling tax disputes before they go to court.
In many cases, an Offer in Compromise that is rejected can be renegotiated and settled through the IRS Office of Appeals. However, it’s better to try to reach an agreement before the case gets to the appeals stage.
How to negotiate an appeal
If you’re filing an appeal, make sure you have all the records and evidence to support your position.
During the appeal, you’ll be communicating with the Appeals Officer. To win your appeal, you will need to be able to rely on your evidence, the IRM, case law, and the Internal Revenue Code.
The Appeals Officer cannot communicate with the examiner who rejected your offer. This allows you to present your original case to the Appeals Officer if you believe there is enough evidence to support it. In addition, you can strengthen your case by providing further evidence before it is sent to Appeals.
The Offer in Compromise program lets taxpayers start over. The IRS rejects more offers than it accepts each year, though. Because of this, you should consider carefully whether it is the best strategy for resolving your outstanding tax liabilities.
If you qualify under one of the three categories and are eligible, paying attention while you complete the forms and gather all the supporting documentation increases the chances of your Offer in Compromise package being accepted.
Taxpayers who want to make an offer in compromise must also keep up with their tax obligations while it’s pending and for five years after it’s accepted.
By meeting all the requirements, you could get a fresh start but still pay far less than what your outstanding tax debt is.
If in doubt, seek professional assistance
The Offer in Compromise process can be very straightforward for many tax debtors, especially if you have no significant assets and are low income. But if you have assets and/or have a middle to high income, you can still qualify for an Offer, but the process becomes much more complicated.
If you’re facing tax issues, call me right now for a free friendly consultation, at 805-244-5291.