If you owe back taxes due stemming from unfiled tax returns, you have probably heard dozens of radio ads imploring you to contact a tax relief company and settle your tax debt for pennies on the dollar. Is this really true? Believe it or not, the answer is yes: it may be possible for you to settle your tax debt with minimum expense by submitting something called an Offer in Compromise, sometimes abbreviated to OIC, to the IRS and applicable state tax bureaus.
While Offers in Compromise can be tremendously beneficial to taxpayers who owe unpaid back taxes to the Internal Revenue Service, the submission process can be highly complex. Because OIC procedures are difficult to interpret and effectively navigate, taxpayers are strongly advised to work with an experienced California tax attorney like Robert Hoffman. Robert will handle your paperwork, negotiate aggressively to minimize your payments, and protect your legal rights as a taxpayer at each step of the process so that you can take full advantage of what the OIC program has to offer.
To arrange for a free and completely confidential legal consultation, call The Law Offices of Robert Hoffman at (800) 897-3915 today.
What is an Offer in Compromise?
The IRS’ Offer in Compromise program was designed to help taxpayers reenter compliance by making affordable, reduced-rate payments on back taxes. The program takes its name from the fact that the taxpayer makes an “offer,” which is then negotiated with the IRS.
In some cases, taxpayers have been able to repay as little as 1% of their tax obligations. For many people, obtaining an OIC means erasing financial liability for thousands of dollars. As stated by the IRS itself:
The offer program provides eligible taxpayers with a path toward paying off their tax debt and getting a “fresh start.” The ultimate goal is a compromise that suits the best interest of both the taxpayer and the IRS.
Will I Qualify for a Settlement? How is it Calculated?
It goes without saying that every taxpayer would like to reduce his or her tax obligations. However, only certain individuals will be approved for OIC consideration by the IRS. Whether you qualify — and the extent of your savings — will depend on your unique financial circumstances, along with the skill and persistence of your representative.
Section 7122 of the Internal Revenue Code permits the IRS to compromise on a taxpayer’s tax liability. Determining whether a taxpayer qualifies for a settlement requires extensive financial analysis and factual inquiry.
Where federal income tax is concerned, there are two main scenarios in which the IRS will accept a settlement:
- Doubt as to Collectibility — Refers to whether the IRS will be able to collect on your tax bill.
- Effective Tax Administration (ETA) — Refers to inability to pay due to exceptional circumstances which create financial hardship.
When filing an Offer in Compromise due to Doubt as to Collectability, the IRS will analyze your expenses, income, and assets to calculate the amounts which the IRS believes would be collectable through:
- Property Seizures
Then, this data is compiled into what the IRS terms your “Reasonable Collection Potential.” If your offer falls within the ballpark of the IRS calculations, your OIC is likely to be accepted.
How Taxpayers’ OIC Eligibility is Determined
Before the IRS considers whether or not to accept your Offer, investigators will consider a number of factors. First, they’ll make sure that accepting your offer does not undermine overall compliance with federal tax laws. They will also evaluate your financial situation, including whether or not pursuing the full amount of tax liability owed would create undue economic hardship.
Beyond your financial situation, the IRS may also factor in any special circumstances, including anything which might be “detrimental to voluntary compliance.” In short, this means that the IRS will consider a settlement on the debt where the taxpayer has a long-term illness, or is the victim of unforeseen circumstances that make it unfair to collect the full balance of the tax.
Most state tax bureaus also allow settlements through an OIC, although the name of the program may vary. In California, for example, the Franchise Tax Board uses a similar formula in assessing reasonable collection potential. However, one key difference in the California approach is that your future earnings potential is also considered. Thus, obtaining a settlement with the State of California is much more difficult — particularly if the taxpayer is young and healthy.
How Long Does the Process Take?
Usually, an Offer in Compromise will be assigned within about six months from the time you make your submission to the IRS. Some will be assigned in as little as two or three months, while others will await assignment for almost a year.
Once assigned, an Offer is generally evaluated within 30 days. While an appeal can add one to three months to the process, this is a small price to pay to achieve the desired result. If you’re married, you may also want to consider innocent spouse relief as an option to help you or your partner avoid penalties due to actions beyond their control or knowledge.
Important IRS Policy Updates for 2015
The IRS recently issued an alert stating that new and revised Offer in Compromise forms (and accompanying instructions) would become available in January of 2015. Taxpayers are therefore instructed to use the updated version of Form 656 (Offer in Compromise). Depending on your particular employment circumstances, you may also be required to submit ancillary OIC forms including:
- Form 433-A (Collection Information Statement for Wage Earners and Self-Employed Individuals)
- Form 433-B (Collection Information Statement for Businesses)
When submitting your materials, you will also be required to pay an application fee of $186, as well as the initial offer payment. These payments may be waived if you meet IRS Low Income Certification stipulations.
New revisions to Form 656 for 2015 include, but are not limited to:
- Updated submission rules, including major updates to Section V (Payment Terms).
- A new checklist to help taxpayers keep track of their tasks and documents.
- A new matrix designed to help taxpayers determine which forms and payments they are required to submit to the IRS, including TIPRA payments affected by the Tax Increase Prevention and Reconciliation Act of 2005.
- Form 656-PPV (Offer in Compromise – Periodic Payment Voucher), which is meant to help taxpayers remit TIPRA payments.
- Form 656-A has been renamed to Income Certification for Offer in Compromise Application Fee and Payment.
Be advised that if you use the outdated forms from previous years, processing of your documentation may be significantly delayed.
The process of preparing and negotiating an Offer in Compromise can be confusing and complicated, and it will definitely be time-consuming. You should strongly consider speaking with a licensed tax professional with experience preparing Offers in Compromise, and be careful when speaking with a tax resolution firm that makes promises that sound too good to be true without undertaking a complete financial analysis.
To begin discussing your goals in a free and private legal consultation, call tax attorney Robert Hoffman right away at (800) 897-3915.