What is an IRS Offer in Compromise?
Tax debts can spiral out of control to the point where the taxpayer’s ability to pay is rather limited. The IRS Fresh Start program makes it easier for taxpayers to pay back taxes and avoid tax liens — part of this program is the IRS Offer in Compromise.
An Offer in Compromise allows you to settle your tax debt for less than the full amount you owe. It may be a legitimate option if you can’t pay your full tax liability, or doing so creates a financial hardship. Essentially, the IRS thinks it is better for taxpayers to pay them as much as they can than to have an IRS tax debt hanging over the taxpayer.
Sometimes, compromise is a necessity!
Should I file an Offer in Compromise?
Such a question is impossible to answer without taking a look at your full financials, your tax debt, planning strategies, and other alternatives open to you that may actually settle your taxes for less or end the problem quicker.
When the IRS reviews your case to determine if they are willing to accept your offer, they will take the following factors into consideration: your ability to pay, your income, your expenses, and your asset equity.
There are a number of things that can stop you from being eligible for an Offer in Compromise. If you’ve recently filed for bankruptcy, you won’t be eligible to apply for an offer. Also, the IRS will search back the past 10 years to see if you’ve dissipated any assets in an attempt to hide them.
How much can I save with an Offer in Compromise?
Be wary of anyone who promises you a certain amount of savings on an IRS Offer in Compromise. There is no set formula; it’s not a certain percentage of what you owe or how much you make. It’s based on what the IRS thinks is a reasonable amount that you can pay — they determine this by looking at all of your assets, debts, etc.
Tips on getting your Offer in Compromise approved
1) It’s incredibly important that you are current. Being current can be defined as follows:
- For the average taxpayer, being current means that your current tax withholdings are correct;
- If you’re self-employed, it means that your estimated payments are being made quarterly; and
- If you’re a business trying to settle payroll taxes, your deposits must be current for at least two quarters in a row
2) Substantiate your offer! Always provide the IRS with detailed oriented, well organized information.
3) Ensure that your submission is reasonable based on your ability to pay. You can’t trick the IRS.
4) Don’t be afraid to fight the IRS’s claims if you think they made a mistake; if you know you are right you can appeal their decision.
Offer in Compromise processing times: How long will it take?
The first step on the road to Offer in Compromise success is to get your proposal marked “processable” by the IRS. This alone takes about 3-6 weeks.
Next, you’ll be assigned an IRS examiner. You will get a letter that will state who they are and will give you their contact information. Expect to wait another 4-6 weeks to receive this letter.
The examination will then begin! At this point, your assigned examiner will go through all of the documents you submitted. The examiner will find out what your true income is, and will also audit your assets to find the total worth of everything that you own. Their job is to determine what your Reasonable Collection Potential (RCP) is over the remaining collection period. This step — the examination — can take anywhere from 4 weeks to 8 months, depending on who you get as an examiner and the complexity of your situation.
During the fourth step, the examiner will either accept your proposed amount or reject it. If you are rejected, and you have valid counter-claims, it’s necessary that you raise them.
If your Offer in Compromise is accepted at this point, it’s likely taken about 6-8 months. However, if you have to rebut the rejection and then are accepted after the rebuttal, you can expect the process will take about 8-12 months.
If your offer is rejected and you decide to appeal, the entire processing time for your offer will likely end up being between 14-24 months.
IRS Fresh Start Program
The Offer in Compromise is only one part of the IRS Fresh Start Program:
- Installment Agreements: The Fresh Start program expanded access to streamlined installment agreements to make it easier for taxpayers to get into a payment plan
- Tax Liens: The Fresh Start program increased the amount that taxpayers can owe before the IRS generally will file a Notice of Federal Tax Lien
It’s good to know that there are options when dealing with the IRS!