Perhaps you’re fighting a tax debt, and the idea of settling for less than what you owe sounds just a little too good to be true. Fortunately, the IRS has a program that can make this little dream of yours a reality, and it is called an Offer in Compromise. But before jumping in head-first, you’ll want to know how this works, who qualifies, and if this truly is the best option for your financial situation. In this article, we show everything from how an OIC works, the role of Offer in Compromise specialists, and other ways of settling tax debt. We will explore ways tax planning services can help avoid future debt.
Contents
How Does an Offer in Compromise Work?
An Offer in Compromise is a program through which IRS allows one to settle his or her tax debt for less than the amount owed. IRS will analyze the financial condition of a taxpayer, including his or her income, assets, and essential cost of living to determine his or her reasonable collection potential. The OIC endeavors to secure the maximum possible from a taxpayer who, under any other circumstance, could not pay his or her tax liability in full.
How Payment is Made in an OIC
When an OIC is accepted, the taxpayer is required to pay the accepted amount in one full payment or over a payment plan. When the full settlement is paid, the IRS considers the debt settled, removing any liens and wage garnishment.
While this may sound like an easy way out, not every OIC is accepted by the IRS. The IRS is strict about accepting these applications; hence, one should know if they qualify and if this is the best option for their financial situation.
Who Qualifies for an Offer in Compromise?
Not all people are eligible for an Offer in Compromise. The IRS accepts an OIC only if they believe it is the most they could receive within a reasonable time. Some of the following are factors the IRS considers:
Ability to Pay
The IRS shall consider your current level of income, living expenses, and assets to determine whether you are able to pay your tax debt through alternative means.
Income versus Expenses
If your monthly income is less than the necessary living expenses, you might be eligible to apply for an OIC.
Asset Equity
If you have large assets, such as property or investments, the IRS may expect you to sell or borrow against them before accepting an OIC.
The IRS has a Pre-Qualifier tool on its website, through which you can see if you qualify. If finances don’t quite meet the bill, then you may need to consider other options.
The Role of Offer in Compromise Specialists
Being in an OIC might be a scary thing to have to navigate; that’s why most taxpayers will try to find an Offer in Compromise specialist to help them work their way through this process. These specialists are usually tax attorneys or enrolled agents who have experience in negotiating with the IRS for their clients and preparing all the paperwork correctly.
Eligibility Check
Professionals can review your financial status and determine if an OIC is, in fact, the better option or if another course of action may be more applicable, such as an installment agreement.
Paper Preparation
Filing an OIC requires a great deal of paperwork; thus, it involves Form 656 with financial statements, such as Form 433-A-OIC. Specialists ensure that everything is appropriate and complete, hence reducing the chances of rejection.
IRS Negotiation
If the IRS wants more information or wants to make a counter-offer, the specialists can negotiate on your behalf to get the best possible outcome.
Utilizing an OIC specialist will increase your potential for approval while protecting you from costly mistakes that cause delays or rejection of the process.
Offer in Compromise Alternatives
An OIC is not for everyone, and there are other avenues to consider when dealing with tax debt. Some of the common options available include:
Installment Agreements
If you cannot pay your tax debt but do not qualify for an OIC, you may be able to set up a payment plan with the IRS. This simply means you are granted permission to make reasonable monthly payments over time when paying off the debt becomes more feasible for you.
Currently Not Collectible Status
If you can prove that you have extreme economic hardship and cannot pay anything presently, the IRS might temporarily classify your account as “Currently Not Collectible” or CNC. This does not wipe out debt but stops collection efforts such as wage garnishment and levies.
Partial Payment Installment Agreements
You will be able to pay less each month because you are paying an amount based on what you can afford. It differs from the regular installment agreement in that there are possibilities of the payments not being able to cover your debt.
Each alternative has advantages and disadvantages, and a tax professional will be able to advise which will suit you best.
Is an Offer in Compromise the Best Option for You?
Whether or not an OIC is the best option for tax relief is personal and depends on one’s financial situation. The following are some factors to consider:
Financial Hardship
An OIC can be a lifeline when payment of the full amount of your tax debt will create severe financial hardship. If you could reasonably make payments through an installment agreement, you may want to explore that avenue.
OIC Acceptance Chances
The IRS accepts only a few OIC cases annually and only when the taxpayer cannot actually pay his or her full debt. If your financial situation falls outside of the IRS’s parameters, you may have a better option.
Professional help from the Offer in Compromise specialists would, therefore, be of immense help so that you will know if the OIC is the best route for you or if another method will serve better, like an installment plan for example.
The Offer in Compromise Process: A Step-by-Step Guide
If you think that an OIC fits your needs, here’s how to file in a step-by-step manner:
Pre-Qualification
You can use the IRS’s Pre-Qualifier tool, or you can have a professional check whether you qualify.
Gather Financial Documentation
You will need to gather income statements, bank records, asset data, and living expenses.
Completion of IRS Forms
You will need to fill out Form 656, Offer in Compromise, and Form 433-A (OIC) or 433-B (OIC) for businesses.
Make an Offer
You will need to submit your forms with a non-refundable application fee of $205, along with a portion of your offer amount.
Review by IRS
The IRS will review your offer. This could take months, and during this time, the IRS may ask for additional information with supporting documentation.
Accept/Appeal
If the IRS accepts the offer, one will start making the payments. If rejected, you have a chance to appeal within 30 days.
Tax Planning Services Can Prevent Future Tax Debt
Probably the best way to avoid the need for an Offer in Compromise in the future is through proactive tax planning services. These services will help you make informed financial decisions throughout the year that minimize your tax liability and prevent you from falling into debt with the IRS.
Optimize Deductions
A tax planner will ensure that you are utilizing all the deductions you are entitled to, hence reducing the income liable for taxation.
Handle Estimated Payments
If you are self-employed or receive incomes that do not have taxes withheld, tax planning will help you manage estimated payments to avoid underpayment penalties.
Retirement Contributions
Contributions to retirement accounts such as IRAs or 401(k)s reduce your taxable income while serving the dual purpose of saving for the future.
That way, you won’t have any future tax debt, let alone need to use an Offer in Compromise or any other alternative for tax relief.
Conclusion
An Offer in Compromise can be one of the most excellent ways of settling your tax debt for less than what you owe, but it is not a solution that will work the same in every situation. Understanding how this works, whether you qualify, and how the professionals at Offer in Compromise specialists can help you through this process is key to making the right decision. Exploring alternatives and investing in tax planning services can also go a long way toward ensuring you do not find yourself burdened by tax debt in the future. Done correctly, and you’ll be back on track, having gotten a second chance at long-lasting tax relief.
