By: Lance T. Denha, Esq.
For those who have seen their outstanding taxes accumulate over the years due to various factors including, but not limited to, the loss of income, inability to pay, expenses and insufficient asset equities, the IRS will allow an Offer in Compromise to settle your outstanding taxes, but only if you meet certain criteria.
An Offer in Compromise (“OIC”) allows delinquent taxpayers to settle tax debts for less than the full amount owed to the IRS. This could potentially be a legitimate option for those struggling to come up with the full amount owed to the IRS. Believe it or not, the IRS has been somewhat softer in recent years by offering more flexible terms to its OIC program which may enable some of the most financially distressed taxpayers to clear up their tax problems sometimes more quickly than in the past.
The IRS’ determination will ultimately focus upon the taxpayer’s income and assets to make a determination of the taxpayer’s reasonable collection potential. In order for the IRS to consider an OIC, you have to offer an amount that the IRS feels is representative of the reasonable collection potential of the account. The IRS typically only accepts offers that include the value of your current assets plus the estimated amount of your disposable monthly income for the next 4 or 5 years. They are likely to reject any offer below this figure.
The IRS is going to require extensive information about your financial situation before they approve your offer. It’s important to keep at least three months worth of bank statements, records of mortgage payments, retirement account information and other relevant documents. The IRS only accepts offers in compromise if they can verify your financial history.
Of course since all of this criteria in an OIC is procedural, there are forms to be completed as well as fees to be paid in associated with an application. An additional drawback is that if your OIC is rejected, the disclosures you made about your assets will then give the IRS all the information it needs to accelerate its collection efforts against you. For this reason, it makes sense not to submit an offer unless it is likely to be accepted.
The IRS must provide a reason for its decision to not to accept an offer. Typically the IRS rejects OICs for one of two reasons: 1) The offer is too low, or 2) the taxpayer is considered a “notorious character” (i.e. he/she has been convicted of a crime). Should the offer be too low, the IRS will state the amount that is acceptable. After finding out why the offer is rejected, taxpayers can then resubmit the offer.
The key to a successful OIC is making sure that the IRS can process your application, and that you submit complete backup documentation to support your offer. As always it is highly recommended to consult with your tax professional to explore this option moving forward.