How to use an offer in compromise to settle a tax bill with the IRS.
There are times when you can clear the tax slate for a huge discount. If you qualify for a “offer” or “OIC,” which is short for “offer in compromise,” the IRS will accept less than what you owe on a tax bill and call it even.
There is no law that says the IRS has to lower a valid tax bill. It is up to the government to decide whether or not to do so. Most of the time, though, the IRS must at least give an OIC that was sent in the right way a fair look. In recent years, the IRS accepted up to 40% of the OICs that were sent in, which is a higher rate than in years past.
Do you meet the requirements to be an OIC?
It’s not enough to just want to make a deal with the IRS. Everyone wants his tax bill to go down. To be considered for OIC, you have to show the IRS that one of the following is true:
There is some doubt about whether or not the IRS can get your tax bill now or in the near future. This is called “doubt as to collectability” by the IRS.
Because of special circumstances, paying your full tax bill would be “economically difficult” or “unfair” or “unequal.”
“Doubt as to liability” is another, less common reason. Those who want to do this need to fill out Form 656-L. This offer is based on the idea that there is some doubt about whether or not the amount of tax owed is correct. This is a different and more difficult way to go.
The IRS suggests that you use its online pre-qualifier to find out if you can make an offer in compromise.
You can’t just call the IRS and say, “Let’s make a deal,” you have to go through a formal process. Start by filling out Form 656, Offer in Compromise, from the IRS. Form 656 must be sent with a $186 application fee if you want to file an OIC. If your monthly income is less than the poverty line, you might not have to pay the fee. If you want to get an exemption based on the poverty guideline, you have to send in an Application Fee Worksheet from the Form 656 booklet.
As part of the OIC, you must fill out Form 433-A (for individuals) or Form 433-B (for businesses), Collection Information Statement, and send it to the IRS. If you are married and live in a “community property” state, the IRS may ask you to include information about your spouse on your Collection Information Statement, even if you are the only one who owes the IRS money. If you are serious about your OIC, you should take extra care to fill out this form correctly. When considering an OIC, the IRS looks at the information you give on this form much more closely than when you ask to pay your taxes in installments.
One bad thing about sending in an OIC
Getting the forms filled out is just the start. The IRS will ask for a lot of paperwork about your money, including pay stubs, bank records, vehicle registrations, and many other things. This is a very long and detailed process. Some taxpayers end up sending the IRS a lot of paperwork to back up their OIC requests.
Putting in an OIC also has another drawback. If your OIC is turned down, the information you gave about your assets gives the IRS everything it needs to speed up its efforts to get money from you. Because of this, it makes sense to not make an offer if it’s not likely to be accepted.
Also, remember that interest keeps adding up while you’re negotiating an offer in compromise, so if you don’t reach a deal, you’ll end up owing more than ever.
What should you give?
To figure out your minimum offer amount, you will need to follow the instructions on Form 433. Based on what you say about your finances on Form 433, the IRS wants to know how likely it is that they will be able to collect from you. In general, your offer must be:
the “net realizable value” of your assets plus the money you have left over each month after taking out your monthly bills.
Then, depending on the payment period you choose, you multiply this amount by 12 or 24. (either five months or two years). Follow the steps on Form 433-A (OIC) to figure out your minimum offer and explain it to the IRS.
What if you figure out the amount of the offer you need to make by figuring out the net realizable value of your assets and your future income, and the result is much more than you can pay? Even if you are worried about the IRS taking any assets you didn’t tell them about, you might still want to make an offer. Under the effective tax administration (ETA) exception to the OIC rules, IRS employees can take less money than they need to.
People with physical or mental illnesses are given extra attention by the IRS. In particular, the IRS has always given more weight to offers from people over 60 whose financial prospects aren’t good because of their age. The IRS will also look at problems with HIV, drugs, or alcohol, as well as problems with family members, if they hurt your finances.
The best way to let the IRS know about special circumstances is to attach a letter to your Collection Information Statement (Form 433-A). It doesn’t have to be formal or fancy. Just write your story on one or two pages. You’ll also need to include statements from doctors and medical records that show what’s wrong with you. If the medical information doesn’t show why you can’t work much now or in the near future because of your condition, explain this in your own words.
If your offer is turned down, try again.
If the IRS does not accept your offer, they must tell you why in writing. Most of the time, the IRS turns down offers to settle for one of two reasons:
1. Too little is being offered.
2. You are a “famous” person because you have done something bad, like been convicted of a serious crime.
If the offer isn’t enough, the IRS letter will say how much is enough. You also have the right to a copy of the report that explains why your application was turned down. Get a copy from the IRS. Make a request under the Freedom of Information Act if the IRS won’t give it to you.
After you find out why your offer was turned down, you should send it again. The revenue officer or the person in charge of special procedures might be able to help you find a way to make your offer acceptable.
If you make a new offer within a month and your financial situation hasn’t changed much and the new offer isn’t very different from the old one, you don’t need to fill out a new Form 656. Write a letter instead. Say that you want to increase the amount of money in your offer.
If your offer is very different, you need to fill out another Form 656.
How to Appeal a Rejected Offer to Settle
You can call the person who signed the letter and try to get them to change their mind, or you can file a formal appeal. Most of the time, instead of sending appeals to the Appeals Office, the IRS will think about your offer again and try to work something out with you.
File IRS Form 13711, Request for Appeal of Offer in Compromise, within 30 days of the rejection letter to start a formal appeal. Your appeal to a rejected offer in compromise will not be taken seriously unless all of the following are true:
You gave the IRS all of the information they needed to process your offer. You filed all of your past tax returns and are up to date on your tax payments for this year. People who work for themselves must have paid all of their quarterly estimated taxes, and employers must have filed and paid all of their payroll taxes.