Settling Your IRS Tax Debt with an Offer in Compromise
We all know that feeling that happens with you open the mailbox and see the words Internal Revenue Service (IRS) on a piece of mail. Maybe you have a few notices from the IRS claiming you have underpaid taxes from a few years back? Or maybe you had a life changing event that caused you to delay or not file your return a few years ago and now the IRS is sending you hate mail?
We know how tempting it can be to set those letters aside and pretend you did not see them. Doing that, however, can only lead you into more trouble. We have seen clients that have developed serious health problems, at least in part, related to the stress the IRS issues are causing. The uncertainty and the fear of not knowing what might be coming next can lead to elevated stress and perhaps more serious health consequences. Rather than pretending you didn’t see the notices, why not take the first steps to resolve these matters and move on with your life without that fear of the mailbox.
What are my options?
If you have established that the tax amounts the IRS is claiming you owe are correct, then you have several options. One of those options is called an Offer in Compromise (OIC). An OIC is an agreement between you and the IRS that settles the debt for less than the amount claimed by the IRS. This is a way of resolving your tax debt that is beneficial to both parties. In recent years, the IRS has taken a softer stance on such settlements.
What is an Offer in Compromise?
An Offer in Compromise (OIC) can be based upon two grounds: “doubt as to liability” and “doubt as to collectability”. There is a third more specialized basis for an OIC for Effective Tax Administration (ETA) which we will address in a later entry.
Doubt As To Liability
A "doubt as to liability is based on your ability to pay the IRS. While a “doubt as to liability” offer can be useful in some circumstances, it has specific criteria and limitations that may make it a less appealing route for many taxpayers.
Doubt As To Collectability
A “doubt as to collectability” OIC is based upon your actual ability to pay as documented by both income and expenses. Normally, if your assets show an ability to pay the amount owed in full, you will not qualify for a “doubt as to collectability” OIC. Nevertheless, there are circumstances where this is not the case. Certain financial and healthcare situations can lead the IRS to accept a partial offer from individuals showing an ability to pay in full on paper (but for whom the reality is that they cannot).
An Offer in Compromise based upon doubt as to collectability may be helpful for many people in these days of economic hardship where incomes have not kept up with debt.
How to Apply for a 'Doubt As To Collectability' OIC
Calculating Income & Expenses
The OIC process involves an application containing detailed documentation of both your total household income and the total household expenses. The IRS allows for baseline expenses for items such as household expenses depending on where you live without requiring documentation, but other items such as unusual medical expenses must be documented in detail.
The IRS also has a long list of expenses they will not allow as part of the calculation. Private school tuition for instance is not considered a “necessary” expense. However, the IRS can be convinced in certain circumstances that some “unnecessary” expenses should be allowed, even if on a temporary basis.
Lump Sum vs Short Term/Deferred Payment
Once income and expenses have been calculated to create an accurate picture of what you can pay, then the options of how you wish to pay that amount need to be addressed. An OIC can be paid as a one-time lump sum payment or short term or deferred periodic payments (typically 2-24 months). Other considerations can come into play in calculating your payment amount, such as health issues (short term and long term), the age of the taxpayer, past filing history, and the nature of the tax debt (personal or business).
Get Help Preparing Your Offer In Compromise
The process of preparing an OIC can be tricky for those not familiar with the rules, regulations and customs of the IRS. An experienced attorney with our firm can help you navigate your way through this process to maximize the success of your Offer.