Over 60% of millennials say that they don’t even have $500 in their savings account to help them pay a $500 tax bill.
No matter your age or even your income level, your living expenses and unexpected, costly emergencies can leave you with too little money left over to pay your tax bill in full.
Getting a tax bill that you can’t afford can certainly feel terrifying — and your first instinct may be to sweep it under the rug.
You know that’s not the right decision.
Instead, you need to learn more about offer in compromise guidelines if you can’t afford to pay your taxes.
Read on to learn everything you need to know about working with the IRS to develop an offer in compromise that will help to make your tax burden much more financially manageable.
What Is OIC?
First, let’s dive a bit deeper into what an offer in compromise, or OIC for short, actually is.
In the simplest terms, it’s a way for you to settle the tax debt that you owe the IRS without having to pay the entire amount you owe. You and the IRS will come to a realistic, fair agreement about the amount you can truly afford to pay, and you’ll be responsible only for that amount.
Of course, not everyone will be eligible/approved for an offer in compromise — if they were, all of us would likely submit one in the hopes of keeping more of our money!
There are several offer in compromise guidelines you must adhere to in order to be approved for one. Remember that it’s the IRS, not you yourself, who will ultimately determine both whether or not you can pay your tax bill in full, and the specific amount of the OIC agreed to.
In other words?
The IRS likely isn’t going to buy that you’re only able to pay them $50 — but they may be willing to knock a few hundred dollars off of your tax bill if you qualify.
The IRS may also decide that you are, in fact, capable of making your tax payments, but agree that you’re not able to make a lump sum payment at this time. They may instead set you up with a payment plan.
This allows you to pay your tax bill in installments over a set period of time.
Now, let’s talk about what you need to qualify for an OIC from the IRS.
Offer in Compromise Guidelines for Qualification
There are a few things you’ll need to make sure you’ve taken care of if you want to learn how to get an offer in compromise approved.
First of all, understand that you must file all of your additional tax forms, including estimated tax forms, before applying for an offer in compromise. This means that you may be responsible for submitting some tax payments, but the IRS takes those payments into account when they’re determining your OIC.
Once you’ve completed that, it’s time for the IRS to evaluate your overall Reasonable Collection Potential, or RCP for short.
In a nutshell, the IRS will take a look at how much all of your physical assets are worth. This includes the value of things like your property, your current bank accounts, and even any cars you own.
In addition to this, the IRS will also evaluate your future income minus your most basic living expenses (mortgage payments, electric bills, car payments, etc.)
If you’re able to prove doubt to collectability, then there’s a good chance you will qualify for an offer in compromise.
Doubt to collectibility is when your reasonable collection potential is less than the entire amount of taxes you currently owe. In other words, if you try to convince the IRS that you can only pay an amount that is far lower than your reasonable collection potential, don’t expect to be approved for your offer in compromise.
If you’re still a bit unsure as to whether or not you might qualify for an OIC, use this pre-qualifying questionnaire to help.
But what if you truly can’t afford your tax bill and are nervous that your RCP will leave you with a huge tax liability in the eyes of the IRS?
Remember, your goal is to prove one of two main things to the IRS.
The first is that paying your current tax bill in full would cause you undue economic hardship. The second is to show that the current tax bill you’ve been given isn’t fair or equitable given tax law.
Read on to learn more about the most effective ways to boost your chances for an OIC approval through these two methods.
Understanding Economic Hardship
Nearly 49 million people in the United States alone are living with some kind of disability.
Often, the high costs of treatment, medication, and even equipment like wheelchairs, machines, walkers, etc., can make it hard for these people to meet their tax obligations.
You shouldn’t have to financially suffer for a condition or disability that you have absolutely no way of controlling. Fortunately, the IRS tends to agree with you — especially if you’re currently living on a fixed income.
If you’re disabled, you have a good chance of being approved for an offer in compromise. That’s because, even if you could make your tax payments in an installment, you simply wouldn’t have enough money left over to afford your basic living expenses.
In most cases, you’ll be approved to pay a lesser amount than your original tax bill.
Arguing Against an Unfair Tax Law
Sometimes, even if you can afford to pay the tax bill, you may be able to prove to the IRS that it’s completely unfair — and potentially even not in line with current tax legislation.
For example, you may have handed off your tax filing and payment responsibilities to another firm or accountant. You thought that you were doing everything you needed to do in order to stay on top of your payments.
However, your accountant or firm failed to make the proper payments and deposits. You thought that you were up-to-date on your payments, and made appropriate financial decisions accordingly.
If this is the case, then you may be able to get an approval for an offer in compromise. This happens because you/your company wasn’t actually responsible for these missed payments and because you took the appropriate action immediately when you realized there was an issue.
You may also want to look into tax liability doubt, especially if the unfair tax law argument may not work for you.
Here, you’ll be able to show evidence that the tax bill you’ve been given is incorrect.
Additional Offer in Compromise Guidelines
The offer in compromise guidelines developed by the IRS aren’t exactly straightforward.
Now, let’s go over a few other things you need to understand about how to get an offer in compromise approved.
How Long Does Offer in Compromise Take?
The length of OIC approval varies depending on your unique situation, but there are a few things that most people can expect.
In general, the IRS will need anywhere from three to six weeks to decide whether or not your offer in compromise makes sense.
If you’re approved, the OIC is then transferred to an Offer in Compromise Examiner at the IRS. You’ll then need to wait another 4-6 weeks for a letter from the Offer in Compromise Examiner to arrive in your mailbox.
This letter will give you the OICE’s contact information — it won’t tell you whether or not you’ve been approved just yet. It indicates that the OICE is reviewing your current Reasonable Collection Potential, conducting personal audits, and reviewing any documentation you’ve sent to them regarding your OIC.
In most cases, you can expect to get either an acceptance or a rejection roughly 6-8 months from the date that you first sent in your OIC.
How Much Should I Offer in Compromise to the IRS?
Once again, the exact amount of your OIC will depend on your unique circumstances.
However, there are a few basic rules you should abide by if you want a good shot at being approved.
First of all, do not attempt to low-ball the IRS. They have all the documentation they need to know that you can afford to pay more than you’re offering, even if you can’t afford to pay the full amount. That’s a fast-track to a rejection — and it’s just not worth it.
You need to be realistic while also being fair to both yourself and the IRS.
You should attempt to get a ballpark figure of your current RCP in order to help you understand how much to offer.
First, add up all of your sources of income each month. This means your work paystubs, any investment accounts you have, side hustles, etc. Then, determine the costs of your basic living expenses. This means things like gas, groceries, rent/mortgage payments, your car, etc.
Your total monthly income minus your living expenses each month is your RCP. Then multiply your RCP by 12 to get your annual RCP.
Offer at least that if you want to get approved.
The Application Fee
Yes, unfortunately, you will need to pay an application fee if you plan to apply for an OIC.
You can use Form 656 from the IRS to help you understand the ins and outs of your total fee.
Just make sure that you don’t include the application fee in any current tax payments. You need to pay for it as an entirely separate charge.
The good news is that if you are a low-income exception according to the IRS, or if your reason for filing an OIC is because of tax liability doubt, you will not have to pay the application fee.
Handling an OIC Rejection
Unfortunately, even those who adhere strictly to the offer in compromise guidelines may still receive a rejection from the IRS.
What should you do if this happens to you?
First of all, make sure that it truly us a rejection. In some cases, you may have failed to properly fill out or even complete your OIC form. You may also have failed to make your previously required tax payments before sending in your OIC.
However, if you’re sure you’re dealing with a rejection, don’t panic just yet.
Remember that you’re allowed to appeal.
Just make sure that you do so within 30 days of your receipt of the rejection.
Even if it’s rejected again, you’ll at least have bought yourself a bit more time to get your finances in order. That’s because the IRS won’t collect taxes from you during the appeal process, while your initial OIC is pending, and for 30 days following a rejection.
Above all, especially if you’ve received a rejection, don’t attempt to handle the situation on your own.
Instead, connect with a qualified and experienced tax professional who can help you to greatly increase your chances of approval.
Need Professional Help with an Offer in Compromise?
We hope that this guide has given you a much better understanding of whether or not you’re likely to qualify for an offer in compromise from the IRS.
Need the help of an expert accountant to file your OIC, fight back with an appeal, or understand how to properly complete the forms?
That’s where we come in.
In addition to helping you to better understand and meet current offer in compromise guidelines, we can also assist you with audit defense, criminal and emergency tax services, tax fraud investigations, a seizure of assets, and much more.
No matter what kind of tax issue you’re facing, remember that you don’t have to — and shouldn’t — face it on your own. Instead, we urge you to get in touch with us today to begin the process of finding the right solution.