Owe money to the IRS? Then check out its Offer in Compromise program. You may get out for pennies on the dollar.
We have all been told, “To err is human, but to forgive is divine.” Unfortunately, Uncle Sam didn’t get the message.
If you flub your taxes, sooner or later you are going to find yourself saddled with a hefty bill: Back taxes, interest, penalties, and fines, not to mention the expense of hiring a tax preparer to represent you during the audit process.
The Offer In Compromise program allows qualified people with unpaid tax debt to negotiate a settlement that is significantly lower…
Solopreneurs and business owners who are in debt to the government have several options. They can request a monthly payment plan, seek bankruptcy protection to absolve their debts, or submit an Offer In Compromise, also known as an OIC.
Understanding the OIC Program of the IRS
The OIC program allows qualified individuals with an unpaid tax debt to negotiate a settlement that is significantly lower than the total amount owed. For a solopreneur with unresolved tax debts, the program represents an opportunity to wipe your slate clean at a deeply discounted rate, sometimes as low as 1% or 2% of your overall debt.
As a taxpayer or taxable entity, you and your business have a legal right to file an OIC for any liability related to unpaid taxes, and the IRS is obliged to review and consider every OIC.
However, that doesn’t mean that your offer will be automatically accepted. In the past few years, less than a quarter of all the OICs submitted by small business owners were accepted by the IRS.
But even if your offer is rejected, you can still fight to have your debt reduced by taking your OIC directly to the IRS Appeals Office.
The OIC program was created to expedite agreements between taxpayers and the IRS, when acceptance of the offer is in the best interest of both parties. Basically, if the government believes that you may never be capable of paying the full amount of your outstanding debt, or if there is any doubt as to whether or not you are actually liable for the debt, then the government can waive any and all of your tax debt.
Qualifying for an OIC Settlement
In order to qualify for an OIC settlement, you and your business need to meet at least one of the following three criteria:
- You can convince the IRS that your liability may have been incorrectly assessed.
- You can show the IRS that you are unlikely to be able to pay your tax debt in full.
- You can demonstrate that due to extenuating circumstances, your tax debt would “create an economic hardship, or would be unfair or inequitable.”
How to Submit an OIC
Submitting your offer is a formal process (we’re talking about the IRS, after all), and depending on the circumstances of your case, the application and review process can be time-consuming, convoluted, and frustrating.
To begin, submit a Form 656, along with a $150 dollar application fee. If you are offering to settle your debt in less than five months, then you must enclose a minimum payment of 20% of your offer along with the application. If you are going to need more than five months to settle your debt, then you must include your first payment installment, and you must continue to make scheduled payments while your offer is pending.
The payments establish good faith, and even if your offer is rejected, these payments will go toward reducing your overall debt.
Now the big question: How much should you offer? According to Uncle Sam, the amount of an OIC must be equal to the “realizable value” of your total assets, plus whatever amount of money the IRS could take from your future income—this number is known as the Reasonable Collection Potential, and it is the single most important factor determining the success or failure of your offer.
It is not always easy to calculate your Reasonable Collection Potential, but you can find help either on the IRS Form 433A Worksheet, or by working with a professional tax preparer.
And if your offer is rejected, try, try again. After finding out why your offer wasn’t accepted, resubmit a new OIC… and keep your fingers crossed.
RESOURCE: The IRS Page for Offers in Compromise
Do you have an experience with an Offer in Compromise and the IRS? Consider sharing your story below, in the comments section of this page.