Posts Tagged OIC

How Does One Qualify for An Offer in Compromise?

Posted on June 12, 2011 | Tax Studies.

Misinterpretation of the Tax Law and erroneous information causes many taxpayers to owe taxes way beyond their ability to pay. Every year, the IRS conducts thousands of tax audits to both individuals and businesses. In most cases, they audit taxpayers who either have red flag items in their tax returns or for whatever reason, if they suspect that a tax return was filed with erroneous information. Given the complexities of the Tax Law, after an audit, one can easily find that they have not been paying for a certain tax element for years. The outstanding taxes, interest, and penalties charged on the tax debts will, in many cases, go beyond one’s ability to pay. However, to protect taxpayers from going into bankruptcy or serious financial hardships, the IRS provides various tax payment options that can enable such a taxpayer to suitably meet their tax obligations. One of these payment options is an Offer in Compromise (OIC).

An Offer in Compromise is an offer that the IRS gives to taxpayers who lack the ability to meet their tax obligation. Depending on your ability to pay, the IRS can write off up to 99% of the tax debt, leaving you with a tax liability that you can manage to pay. Taxpayers who may find themselves owing a huge lump-sum amount of taxes, especially after a tax audit, can apply for an Offer in Compromise. The IRS will require you to provide them with all information about your finances, assets, and debt portfolio. Based on the information forwarded to the IRS, they make a decision about how much you can afford to pay them and write off the difference. According to the Internal Revenue Manual, there are three situations that can qualify a taxpayer to be awarded an Offer in Compromise:

Doubts on Ability to Pay

The first reason that can cause the IRS to write off part of a tax liability under the OIC is if there are doubts on the taxpayer’s ability to repay the tax debt. To determine a taxpayer’s ability to pay, the IRS reviews the assets, the income level, and the financial situation of the taxpayer. If a business makes turnovers of $2,000.00 and owes taxes, interest, and penalties of $250,000.00, most likely, the business cannot raise the funds to pay for its taxes, even in installments over 5 years. Therefore, as opposed to pushing the owner out of business, the IRS can require the business to pay a reduced tax amount that will keep the business running. This way, the IRS will not lose out on the whole outstanding amount.

Doubts as to Existence of Tax Liability

The other reason that the IRS can consider for an Offer in Compromise is if the taxpayer was unaware about the erroneous information in the tax return and did not know that they owed the taxes. Though ignorance is no defense, the IRS does consider that taxes are at times, a complex subject, and one can genuinely be unaware of a tax liability. For example, an innocent spouse may find themselves owing taxes they were not aware of when they filed a joint return with their spouse. However, due to time limitations or other rules of limitations, they may be disqualified for an Offer in Compromise. The IRS can consider writing off the debt under an OIC since the taxpayer was not aware that the tax liability even existed.

Payment Would Lead to Financial Hardship

Even if a taxpayer can afford to pay off their taxes and therefore not qualify for an OIC (under the first reason), the IRS can still consider a taxpayer for an OIC if making such payment would leave the taxpayer in economic hardship. The IRS considers reasonable expenses, other financial obligations, and the current financial situation of the taxpayer. For example, if a taxpayer has dependents, the IRS would consider an OIC to keep the taxpayer from being unable to pay for necessary expenses such as school fees or refrain from selling the taxpayer’s house (which would leave the family of the taxpayer homeless).

Offer in Compromise and Installment Agreements

Posted on May 22, 2011 | Tax Studies.

Tax resolution services mainly deal with two arrangements: An Offer in Compromise and Tax Installments Agreements. These firms are usually run by tax attorneys and they negotiate on behalf of clients for “An Offer in Compromise” so as to have some or all of the tax liabilities of their clients forgiven by the IRS or negotiated for Installation Agreements that seek to have their clients’ tax debt paid in installments over a span of a couple of years as opposed to paying a lump sum payment.

An Offer in Compromise

An Offer in Compromise (OIC) is a negotiated deal that the IRS gives to a taxpayer who has an outstanding tax liability and is unable to pay it off for one reason or another. The Offer reduces the tax liability of the taxpayer depending on his or her ability to pay and reduces the tax debt to as little as 1% of the taxes owed. OIC is given at the discretion of the IRS and is not a right of any taxpayer. However, with proper representation, a taxpayer can win the tax waiver on a portion of the tax debt. To qualify for an OIC, you need to have made full disclosure and correct submission of your tax returns. The chances of winning an OIC are low (below 50% of applications). According to the IRS, there are three reasons that can qualify a taxpayer for an Offer in Compromise.

  • Doubts on Tax Collectability – The first condition that can grant a taxpayer an OIC is if there are doubts as to whether the IRS can successfully collect the tax debt from the taxpayer within the time frame allowed by the law. To qualify, the taxpayer needs to have no assets that they can cash out and their monthly income too little to pay the tax debt while paying for their necessary minimum living expenses.
  • Doubt on Accuracy of Tax Liability – This is a rare qualification option for an OIC. To qualify, there must be significant doubts as to whether you really owe the tax liability that remains outstanding. This can happen if the taxpayer produces new evidence that casts doubt on the existence or legitimacy of the tax liability or if a tax law was misinterpreted when determining the tax liability.
  • Exceptional Circumstances – Even in situations where the tax liability in question is correct and the taxpayer can manage to make payments, the IRS can still consider an OIC if payment of the tax liability would have the taxpayer living in financial hardship or if paying the tax liability would be unfair in one way or another.

Installment Agreements

Installment Agreements are another product negotiated through Tax Resolution Services. The IRS provides various installment payment plans for taxpayers who have a tax liability that they cannot pay off in a single lump-sum (without having the taxpayer suffering below the necessary living standards). People who owe the IRS below $25,000.00 can go for a Streamlined Installment Agreement that does not require forwarding financial documentation to the IRS. On the other hand, if a taxpayer owes over $25,000.00, they will need to call the IRS and negotiate for an Installment Agreement. A tax resolution service can also assist in negotiating for such installments, if you plan to hire someone.