IRS Or State Offer In Compromise: What You Need To Know

An Offer in Compromise (OIC) is one of a number of solutions available to individuals and businesses with tax debt. It is, in plain terms, an agreement between the taxpaying individual or business, and the Internal Revenue Services (IRS) or State taxing authority to settle a tax debt for less than the full amount owed.

Image of laptop, coffee cup, and tax forms and notes

To qualify for an OIC, it means you or your business can’t pay the full tax liability owed to the IRS or State, or in doing so it would create financial hardship for you and your family. The IRS or State will consider the set of facts and circumstances in regard to:

  • Ability to pay
  • Income
  • Expenses
  • Asset equity

The IRS or State will assess you or your business from a financial standpoint to make a determination of the overall ability to pay back the debt now and over the next five years.

But before this stage of resolution is reached, a rigid process must be initially followed. All paperwork and payment requirements need to be in order before you or your business can file for an OIC. Further, if you or your business is in an open bankruptcy proceeding, you are not eligible to apply.

When Is It Right to File for an OIC?

You or your business have very limited funds and it doesn’t look like it’ll get better in the future.

In an offer in compromise, the IRS or State must be convinced that they will be unable to collect the amount of money you owe them, in the timeframe they have to do it (10 years).

You or your business have minimal equity in assets.

What is your stuff worth? Your car, house, retirement plan, etc.? Subtract any loans to arrive at equity, and in most cases, reduce that by 20% to get to your IRS or State valuation. Add your cash flow (multiplied by a factor of 12 or 24) to your asset value, and you have your proposed IRS or State settlement amount.
The IRS or State typically reduces the valuation of cars and market value of real estate by 20% when determining their worth in an offer in compromise. Most of your personal household goods will be considered out of reach by the tax agency.

Note: You can submit an offer in compromise if you are not “broke” and if you do have equity in assets; it just increases the value of the compromise.

You have considered how long an offer in compromise can take.

Figure six months to a year for the IRS or State to complete an initial investigation of the compromise. If the tax agency is unwilling to accept the amount offered, you or your business then has the right to file an administrative appeal stating your disagreement with the initial findings.

Figure another six months to a year for the appeal. If you or your business can reach an agreement within the appeal process, the IRS or State will allow you to pay the settlement up to two years. It is not until final payment is made that the offer is considered complete.

You have considered the timeframe the tax agency has left to collect the tax.

The IRS or State has 10 years to collect a tax liability, in most cases. States follow the IRS guidelines but there are also different laws in each state. This is another reason to make sure you hire an experienced tax team that has professionals who understand intricacies such as this. Submitting an offer in compromise extends the collection timeframe. For example, if a compromise is unsuccessful after a two-year investigation, those two years are added back into the timeframe the IRS or State has to collect.

Careful consideration should be given to whether it is advantageous to submit an offer if the tax agency is running out of time to collect. Be careful that the offer sends you forward to resolution, not back in time.

What’s Needed To File An OIC

You’ll find step-by-step instructions and all the forms for submitting an offer in the Offer in Compromise Booklet, (Form 656-B). To file an application a non-refundable fee of $186.00 is also required. Your completed package should include:

  • Form 433-A (OIC) (individuals and sole proprietors) or 433-B (OIC) (businesses) and all required documentation as specified on the forms;
  • Form 656(s) – individual and business tax debt (Corporation/ LLC/ Partnership) must be submitted on separate Form 656;
  • Initial payment (non-refundable) for each Form 656.

The IRS and State use a very specific formula in determining the settlement value of an offer in compromise and whether to accept or reject it. Your success depends on how you fit into the tax agency formula.

Because you only have one chance for success and it needs to be done right the first time, it is recommended that you hire a professional to help you file. Keep in mind that there may also be required follow-ups. Therefore, having professional knowledge of a variety of information—critical expense information needed, maximum allowable expenses available for the IRS or State, and how to substantiate if one’s expenses are higher—is important to ensuring the best possible acceptance.

What Happens Next (Individuals)

First, the IRS or State will assess how much they think you can afford to pay them monthly, in an installment agreement.Image of monthly budget sheet

To figure this out they will ask for pay-stubs, and if self-employed, a recent profit and loss statement.

Next, the IRS or State will want to know about your monthly living expenses. There are limitations here. Expenses such as housing, utilities, food, clothing and car loans are subject to the IRS’ Collection Financial Standards.

Basically, the tax agency will place a value on your cash flow (living expenses minus income) and determine what they they think is an acceptable settlement value.

If you can pay the IRS or State the settlement within five months after acceptance, the tax agency values your monthly cash flow by multiplying it by a factor of 12. So $200 of monthly cash flow equates to a settlement valuation of $2,400.

If you cannot pay the settlement off within five months, the tax agency will grant you a 24-month payment term. However, your monthly cash flow – $200/month in the above example – would be multiplied by a factor of 24, increasing the valuation to $4,800.

In other words, the IRS or State gives you a discount for paying them the settlement sooner rather than later. After determining the settlement value of your cash flow, the tax agency will then turn to a valuation of your assets, and add that to the value of your cash flow.

What Happens Next (Businesses)

The process is no less complex for businesses than for individuals submitting an OIC to the IRS or State.Businesses are asked to gather the most current statement from their banking institution, as well as from lenders on loans, mortgages (including second mortgages), monthly payments, loan balances, and accountant’s depreciation schedules, if this is applicable. These requirements are listed straight from Form 433-B, which also states submission of according documentation should accompany the application.

In addition, company vehicles, down to the make, model, year, and mileage, as well as current business assets must be reported. Local real estate listings of properties similar to yours—and any other websites or publications that could show or infer what your business assets would be worth if you were to sell them—can help assess the latter if it is not currently known. Always remember that asset value is subject to adjustments by the IRS or State.

Business income and expense information must be reported as well. From gross monthly income to dividends and more, the tax agency wants to know the precise and full financial picture of your business and accuracy is crucial.

Finally, the tax agency will ask for a suggested minimum offer amount they will consider in review of the overall application.

Also consider, even if your business has been dissolved as a corporation, any previous tax obligations must still be resolved with the IRS and State. This means filing a final tax return, ensuring payment of payroll and unemployment taxes is complete, and remitting to the tax agency any income tax money withheld from employees.

At worst, if your business does not have the assets available to pay off back taxes a repayment schedule will have to be negotiated. The IRS and State will not refrain from coming after unpaid income or payroll taxes and can place liens and levies to collect. In addition, the tax agency can sue those personally responsible for taxes owed.

The IRS or State will only suspend collection efforts if your business ends up in court, through bankruptcy or other litigation. In such case, the tax agency will put your business’ case on hold for six months following the conclusion of the litigation process.

Officers of a dissolved corporation can file an OIC (IRS Form 6565) to attempt to settle outstanding tax debts. The option is available only to businesses that are not under bankruptcy protection.

CuraDebt, a debt and tax relief company, can help throughout the entire process beginning with a comprehensive assessment of your business’ situation because being honest is as important as accurate.

Keep in Mind

The average amount the IRS settles for in an OIC is $6,629. The amount you pay could of course be more or less, depending on how the financial position of you or your business fits into the formula.Keep in mind that the IRS disagrees with taxpayers’ valuations and calculations 60% of the time and rejects those offers. Success is based on a full understanding of the tax agency’s investigative process into your income, living expenses and assets.

It is not a one size fits all situation, further, the amount of one person’s settlement has no bearing on the success of another’s. The IRS does not have a set percentage of settlement to the amount owed.

It all depends on convincing the IRS or State that your financial situation is dismal and that they will never get paid after applying their internal guidelines.

If rejected, you may appeal within 30 days using the Request for Appeal of Offer in Compromise, which is Form 13711 (PDF).

Rather than run the risk of an OIC rejection, reach out to CuraDebt—a reputable debt and tax relief company in the business for over 16 years. We can help you manage your tax situation today. Call 877-999-0486 for a free tax consultation.

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