“In this world, nothing can be said to be certain, except death and taxes.” This quote from Benjamin Franklin still rings true today. It can seem like taxes are a part of almost everything we do and for some people, that can mean trouble. Owing the IRS tax debt can take some people years to pay the debt entirely, which can be very frustrating for someone who’s struggling just to make minimal payments. It can get to a point where it seems utterly hopeless. Fortunately, the IRS can be reasonable in circumstances where it doesn’t look like you’ll be able to pay your debt by offering a service called offer in compromise, or OIC.
You may have seen advertisements for OICs on television commercials, talking about how you’ll only have to “pay pennies on the dollar”. These commercials don’t have a lot of time to fully explain this complicated process, so anyone who’s interested in reducing the amount of taxes they must pay will most likely have a lot of questions. Let’s look at a few common ones.
In addition to reviewing the following information, you can contact the Utah tax law attorneys at Pearson Butler to discuss your unique situation and whether an OIC may apply.
What Is an Offer in Compromise?
Broadly speaking, an OIC is a way to simply pay less than the owed amount to settle your tax debt with the IRS. Paying less is something that everyone would love to do, so, unfortunately, there’s a rather lengthy application process to go through to even just determine if you’re eligible in the first place. On top of that, there’s no guarantee that it will be approved, as the decision is up to the individual examiners who will be reviewing your forms. The IRS, in general, isn’t required to offer a compromise.
Can I Really Negotiate to Lower My Tax Debt?
Some say there’s nothing free in this world, so hearing that the IRS will willingly reduce the amount of money you owe can be a difficult thing to believe, but the deal has been in practice for some time. Remember that the IRS is a governmental organization that is concerned with things like the public good.
Specifically, they’ll be looking to see if paying your owed tax bill would be considered "unfair" or cause economic hardship. In addition to serving the public good, having them reduce your tax amount now might give you enough of an economic boost to pay more taxes later in life, once you’ve got some solid grounding.
However, the IRS will still want most of their taxes coming in smoothly, and OICs are not available to everyone. There’s an eligibility and application process to go through. In fact, of everyone who has submitted an OIC claim, only around a quarter are accepted by the IRS.
Luckily, there is an appeals process that denied applicants can go through to get a second look.
Are “Pennies on the Dollar” Realistic?
Almost every commercial you see about offers in compromise are going to talk about how you will only have to pay pennies on the dollar of the full amount of your owed tax. This is certainly not unbelievable, as the IRS has been known in the past to accept as little as 1% of the total to pay off the entire bill. It’s certainly a possibility that you’ll only have to pay a few pennies on the dollar, but there’s a complex formula they use to determine how much should be paid and when. With that in mind, it’s important to contact an attorney so you won’t have any unrealistic expectations about how much money you’ll owe.
How Do I Qualify for an Offer in Compromise?
Not everyone who wants to pay fewer taxes is going to be eligible. To qualify for an offer in compromise with the IRS, you’ll need to prove that you meet one of these conditions:
- Doubt as to collectability – This means the IRS will want you to show that they’re going to have trouble collecting the bill you currently owe. You’ll need to show that you’ll have trouble paying it now or even in the future during the statutory collection period.
- Economic hardship for paying in full – If it’s at all possible to pay off your bill, you’d need to show that paying it in full would be unfair or cause you a great deal of hardship.
- Liability doubt – If there’s reason to believe that the amount you’ve been required to pay to the IRS is incorrect.
What exactly does that mean? It can be a bit hard to determine if you qualify for one of those three without a real metric to go by. Does it mean that you need to be on the verge of homelessness or starving in the streets? No, not at all.
Broadly speaking, the calculation for qualifying involves taking the sum of your assets, which would include any 401k’s, life insurance policy values, IRAs, and anything else along those lines, and adding it to the amount of your discretionary monthly income multiplied by 12. If that total is over what is owed and if it’s above the IRS’s allowable expenses, then the offer will likely be accepted. Otherwise, it likely won’t.
The Fresh Start Initiative
In addition to the above, the OIC rules have been recently changed drastically to cause much more people to qualify under a program called the “Fresh Start initiative.”
There are many types of people who benefit from their new process, including:
- People who don’t have any retirement savings
- Home renters
- Those with high tax liabilities and few or no assets
- Those who have been rejected for an offer in compromise in the past. This could have been due to either unfavorable dissipated asset determinations or even future income calculations
- People paying off their student loans
- Those with state tax liabilities
- Business owners
These changes have made OICs much easier to qualify for. Even if you’ve had your OIC submission rejected in the past, make sure to contact Pearson Butler to see if you qualify under the new initiative.
I Think I May Qualify. What Do I Do Now?
You’ve gotten all of that together and think you might qualify, what now? It’d be best to then speak with a Utah tax law attorney. You’ll need to submit a few forms and several pieces of documentation. You’ll also be able to make an offer straight to the IRS if you choose.
Forms & Offers
IRS Form 656 is the offer in compromise form, which comes with a $150 application fee that must be attached once it’s sent in. This may be exempt if your monthly income is below the poverty line. If it is, then you’ll need to submit an Application Fee worksheet from the Form 656 booklet.
If there is a “doubt as to liability,” as mentioned in the qualification section, then you’ll need to fill out and file Form 656-L. These forms can be a lot more complex than the others.
Making an Offer
If you’re making the IRS an offer to make 5 payments in 5 months or less, then you’ll have to send along a minimum of 20% of the overall offer. If this is what you’re planning to do, then you must continue to make those proposed payments while your form is still waiting for approval or rejection. The application fee is not refunded, even if your offer is rejected. The payments aren’t refunded either, but they’ll be applied towards your unpaid liability.
Form 433-A (Individuals) or 433-B (Businesses)
Another form you’ll need to send in is Form 433-A or 433-B, depending on if you’re an individual or business (self-employed people will need both). These forms are referred to as Collection Information Statements. This may need to include your spouse’s information if you have one and live in a community property state, even if they don’t owe the IRS any money. Make sure to proofread this form multiple times before actually sending it in, as the IRS is very critical of the information you submit on it, particularly when you’re not offering to make an installment agreement.
After you submit the forms, you’ll be asked to provide quite a few pieces of financial documentation. Here are a few of the documents that are commonly required:
- Vehicle registrations
- Bank records
- Pay stubs
- Mortgage statements
- 401k and any other statements for retirement accounts
- Health care expenses
- Household expenses – including food, clothing, transportation, and child expenses
- Credit card statements
- Complete tax and tax returns for the previous five years
Unless stated otherwise, you’ll generally need at least three months’ worth of statements for each of the above items.
Why Work with an Attorney During an Offer in Compromise?
Not only will a trained attorney make submitting an OIC a lot easier, they’ll also be much more successful at getting an offer approved than you’d be on your own. Even if you think you qualify for an Offer in Compromise and have submitted the forms, the payments, and the proper documentation outlined above on your own, you can still be rejected for several reasons. In addition, it normally takes months to get your pending offer approved or rejected once you’ve submitted the proper forms. In some cases, it can take until the next year. If you decide to go on your own, you could have done something that would have caused you to be rejected and you wouldn’t even know about it until months down the line.
A qualified tax lawyer will be able to look over your personal finances and determine the best course of action to take for your own individual case. They’ll have had plenty of experience and will know what works and what doesn’t. In addition to that, your attorney may be able to help you deal with any collection efforts while you’re in the negotiation process. You may be able to reduce your debt without having exaggerated expectations.
Why Should I Work with Pearson Butler?
At Pearson Butler, we understand that tax debt can take over your life. Our attorneys provide clients with comfortable and thoughtful service throughout the entire situation. Clients aren’t just case numbers; they are real people with their own stories, and they deserve the best service available. Our firm has made a commitment to regularly keep in touch with clients throughout the length of the case and to have cases constantly monitored and maintained by trained lawyers and CPAs, not paralegals, to provide the highest quality service.
The attorneys at Pearson Butler have over 300 years of collective legal experience and have worked diligently in that time to procure a positive relationship with the IRS. When you work with a tax lawyer at Pearson Butler, your lawyer will keep you completely up to date so you can make informed decisions before deciding on any kind of settlement.
If you or someone you know has OIC questions or IRS problems, contact Pearson Butler at (800) 265-2314.