By Ralph Nelson, EA, Kenny Kim, EA, MD
An Offer-in-Compromise (OIC) might be an excellent alternative to paying off your income tax debt for less than the amount owed if the taxpayer has a financial problem that prevents them from paying it in full. While the OIC is an excellent method to solve one's tax problems, most OICs are not accepted by the IRS. Even if the OIC is accepted, the taxpayer may find it difficult to pay the offer amount if their funds are limited.
The IRS will look at your ability to pay based on several criteria, such as income, costs, assets, and liabilities. They utilize various guidelines to see if they should accept or reject an offer. Historically, around one-third of proposals have been accepted.
The OIC may be accepted for one of the following reasons
1. Doubt as to collectability - if the taxpayer's monthly available cash flow, as calculated by the income minus expenditures, isn't enough to pay the entire tax debt before the IRS can collect it (usually ten years from the date of assessment).
2. Doubt as to liability - If the taxpayer disputes that the proposed tax assessment is incorrect.
3. Effective tax administration. This is a one-of-a-kind situation. This may be utilized if the tax debt can be paid in full, but there are special circumstances where the tax debt should be forgiven. A taxpayer with a disabled kid that requires high care might use this example.
Before submitting the OIC, a few things need to be considered.
1. At the very least, the taxpayer must be current with all of their tax filings over the previous six years.
2. If you are in bankruptcy, you will not be able to file an OIC.
You must have enough cash available to be submitted as partial payment for an offer with the OIC application. The lump-sum payment option will be 20% of the offer amount, and the periodic-payment option allows a partial payment to be paid over 6-24 months.
If the offer is turned down, a request for appeal (Form 13711, Appeal of Offer in Compromise) can be filed along with supporting documentation.
If the offer is accepted, the taxpayer should be aware of the following to keep the offer valid.
- The taxpayer must be compliant with tax obligations for the next five years, minimum.
- The taxpayer cannot incur any more tax liability for the next five years.
- There will be no more tax refunds for the next five years.
If you have any questions about the OIC or other IRS tax issues in the Bay Area, please feel free to contact us at (510) 828-6215 (Ralph); (341) 766-1247 (Kenny) or by checking out our website, www.financial-harmony.com