In Overwhelming Tax Debt? IRS Relaxes Offer In Compromise Rules

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If you owe back taxes to the IRS, you’re not alone. The IRS estimates more than $12 billion in back taxes owed. 

In an attempt to receive their money, the IRS offers many options for taxpayers to work out these payments. Sometimes though, people still have difficulty making the payments on time. Whether they have other debts or fell into financial hardships, many taxpayers find they struggle to catch up.

These struggles lead taxpayers to seek options such as an Offer in Compromise. This option isn’t a good fit for everyone that seeks it though. If you want to file for an Offer in Compromise, you need to make sure you meet IRS Offer in Compromise pre-qualifier standards.

These pre-qualifier standards are non-negotiable. They’re in place to ensure only people unable to pay the full amount apply for an Offer in Compromise. There are several qualifications you must meet.

What is an Offer in Compromise?

An Offer in Compromise is an agreement between the IRS and the taxpayer to settle the taxes owed. This settlement involves a reduction in the amount based on qualifications.

Not all applications for an Offer in Compromise get accepted. The IRS accepts close to 40 percent of applications. This acceptance rate increased over the last couple of years with changes to the qualifications.

If the IRS accepts the agreement, you’re allowed to set up a lump sum payment or an installment agreement. You have up to one year to make all agreed upon payments. 

IRS Offer in Compromise Calculator

The amount required for an Offer in Compromise payment gets decided based on the Reasonable Collection Potential. You must offer an amount equal to or greater than this Reasonable Collection Potential.

This amount gets calculated based on your complete assets added to the potential ability to pay in the future. If paying five or fewer installments up to one year of future income gets added. Two years of future income gets added for anything more.

The assets included in the calculation goes further than income. Assets include

  • Income
  • On-hand cash
  • Investments
  • Savings
  • Available credit

Your current level of debt also goes into the calculation. The amount you’re required to pay takes all relevant debts into consideration.

The IRS also takes standards of living expenses into consideration. Any payment plans made need to allow you to pay for the necessary expenses for everyday living. 

What Does the Calculation Determine?

This calculation determines first if you qualify for an agreement. The calculation helps prove your back taxes can’t get paid any other way.

The calculation also determines how much your agreement involves. This will decide the minimum amount you must pay with an Offer in Compromise. It also determines the initial payment you should send with the application.

IRS Offer in Compromise Pre-Qualifier Standards

The IRS website has an Offer in Compromise pre-qualifier quiz available to check whether you’re able to apply. This will help you determine if you meet the qualifications before gathering the necessary documentation.

You need all documentation in order to apply. Any missing information will cause the IRS to reject your application.

Standards to Apply for Offer in Compromise

There are three ways to qualify for an Offer in Compromise.

The reasons for acceptance include:

  • Proving a doubt that the taxes are collectible.
  • Proving a doubt of the exact amount owed to the IRS.
  • Collection could cause a hardship to the taxpayer.

The most common reason for acceptance involves a doubt that the taxes are collectible. You must prove that your assets and income available don’t cover the debt owed. 

You also must make sure you have filed all your tax returns on time during the period when you seek an Offer in Compromise. You also must ensure you make all payments for up to one year. Plus, if you’re a business owner, all deposits must get paid on time.

Qualifications with Application

Unless you meet low-income certification, your Offer in Compromise application must include a $186 application fee. You will also need to include an initial offer payment.

If you miss any of the qualifications, this initial payment will get returned until you’re able to apply again. You will have to include documentation to prove you can’t pay the back taxes any other way.

Before applying, check the other payment options to see if you qualify. You can set up a payment agreement without an Offer in Compromise if you contact the IRS and work with them. If you’re unable to make the full payment this way, you might need to check into the Offer in Compromise application though.

To qualify, you need to provide info about your complete financial situation.

This includes:

  • Cash
  • Investments
  • Savings
  • All assets available
  • Income
  • Available credit
  • Debt

New qualification terms allow you to include student debt and local taxes in your current debt financials. You will also need to include all average income and expenses for the full household. You can also include any explanations about your full financial situation in the application.

The Application

You need to include the full financial documentation and the initial payment. You also need to include the appropriate forms.

You must file form 656 for the Offer in Compromise official application. You also need to file the correct form 433. 

Form 433-A applies to collection information for individual wage earners. Form 433-B applies to business owners.

The application process can take several months to one year for approval. During the application process, the IRS might still file liens on your property, and the collection limitation gets suspended. This means whatever time left on the 10-year limitation stops until a decision gets made.

Issues that Cause Offer in Compromise Denial

If you don’t file your tax returns on time, you will not qualify for an Offer in Compromise. You also disqualify yourself if you don’t get necessary payments turned in on time.

Bankruptcy also disqualifies you. It’s important to determine if your tax issue is the main concern for bankruptcy before filing to ensure you take the best steps for your situation.

You must complete all offer terms or your taxes go into default once again. You must also file and pay on time for the next five years from the time of the Offer in Compromise acceptance. 

Low-Income Certification

If your tax situation will leave you in financial hardship, you might qualify for low-income certification. This makes the Offer in Compromise application process a little easier for you in these situations. 

You will need to qualify to take advantage of low-income certification. For instance, for a family of three, you qualify if your household income falls under $52,000. 

This certification allows you to apply without the application fee. It also allows you to send the application without the initial offer payment. 

Rejection Process

If the IRS rejects your application, you do get the opportunity to appeal the decision under certain circumstances. The IRS sends a letter explaining the rejection including instructions on how to make the appeal. You get 30 days for the appeal.

If the rejection involves missing documentation, your initial payment gets returned. You still have the opportunity to re-apply once you get all the documentation in order.

If you’ve filed for bankruptcy your rejection does not qualify for an appeal. Late filings also disqualify you from an appeals process.

Other Considerations

An Offer in Compromise gets extended to people who will never have the ability to pay the full amount within the time limit for collections. The IRS only has 10 years to collect. They will use the Offer in Compromise to help ensure they get the payment they can.

You must prove you’re unable to pay the full amount. You also need to prove you can pay the amount offered for the Offer in Compromise. You don’t want to default on the payment schedule or you could end up with other assets seized.

IRS Offer in Compromise Tips

You should never file for an Offer in Compromise unless you have no other options. There are several options you should look into first.

Your first step should involve checking your current tax return against past returns. If there’s a discrepancy between the tax returns, you should have a professional re-evaluate the current return to make sure everything’s correct.

Contact the IRS Immediately

The best way to work through back taxes or other tax issues includes communicating with the IRS about your situation. The IRS works with people as long as they stay in communication. 

You can look into payment options as long as you contact the IRS. You can also discuss waiving penalties and other fees in certain situations.

Evaluate Payment Options

The IRS does offer installment plans to help you pay if you can’t pay the full amount in one lump sum. The installment plans involve different payment schedules based on your needs.

Picking an installment plan proves the best option for most people. If you’re able to waive the fees with an installment plan, this might cost you less than any other option.

Make Payments On Time

You want to avoid default on your tax debt. A default can lead to further penalties or other fees. A default can also lead to liens or levies on your property.

If you’re not careful, the IRS might seize your property to pay off your debt. To avoid this seizure, make sure you pay all installment or other payment agreements on time. 

If you’re unable to make a payment, make sure to communicate this immediately. Always work with the IRS to ensure they understand your financial situation.

File Returns on Time

To ensure you can work out any tax issues, you must file all your tax returns on time. Even if you know you owe more than you can pay immediately, you should still file your return on time.

Filing on time ensures you can qualify for any payment options. This also keeps you from incurring other fees for late filings.

Make Sure All Your Forms are In Order

If you want to cut down on taxes owed, you should ensure all deductions and filing forms are in order. If you make sure the correct amount gets taken through the year, you can cut down on the amount owed at the end of the year.

Keeping your deductions in order also ensures you take advantage of any tax breaks that apply to you. This helps cut down on the amount you pay.

You also want to ensure that all your filing information stays in order. Make sure you check for mistakes and fill out all information correctly. This makes sure you won’t have any issues later on with audits.

Work with Professionals

To ensure your tax returns are filed correctly, it’s best to work with a tax professional. An accountant can check for all deductions, including some you might not know about. An accountant can also check for any mistakes with calculations or misplaced info to make sure your return gets completed correctly.

If you’re dealing with tax issues, you should also consider speaking with a tax attorney. A tax attorney can help you determine the best options for your situation. 

They can help you understand the options available to work through your tax situation. A tax attorney can also help you negotiate with the IRS. This will ensure you’re able to reduce any issues.

Finding Advice for Tax Issues

An Offer in Compromise is one of many options available for dealing with your tax issues. You want to ensure you get the right advice to pick the option that fits your needs. Tax issues don’t have to bring your life to a halt.

Whether you need help with the IRS Offer in Compromise pre-qualifier standards, or you need help with an audit, you can contact a tax professional to work out the best options for your situation. If you need help with a tax issue, contact us to talk with a tax attorney.

Managing Partner of Silver Tax Group, author of the book “Stop the IRS”. Practicing a variety of tax issues, regulations, laws and rights. Specializing exclusively on tax matters involving IRS audits, negotiation, settlements & compromises.

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