If we try to imagine an ideal world, a taxpayer will pay all his dues on time in full without breaking the bank. Unfortunately, such an ideal world doesn’t exist for many. Nearly 43% i.e. 77.5 million people in the United States of America alone, fail to pay their taxes on time, leaving the IRS handicapped for money and thus charging penalties on those who aren’t able to pay. But it is not uncommon for many people to fall a little short on money when it’s time to pay their taxes. It’s not like they don’t want to pay their taxes, they just don’t have enough assets or income to file taxes. For such people, there are many options available to help them fulfill their tax obligations. One of these options is submitting an offer in compromise.
In this blog post, we will learn how to get an offer in compromise approved, but before we go directly to the crux, let’s take a look at what an offer in compromise is, who is eligible to apply, what are the different terms and conditions to abide by, the best time to present an offer in compromise and lastly how to get an offer in compromise approved.
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What is an Offer in Compromise?
To know how to get an offer in compromise approved one must know what it really is. An Offer in Compromise (OIC) is a program offered to the taxpayers by IRS to help them pay their tax debts. Those who qualify the conditions for eligibility may be allowed to make an offer and promise to pay a lesser amount of tax owed to the IRS. This allows taxpayers to settle their prior debts and start over fresh so that they can easily pay their current and future debts in full and on time.
Qualifying conditions for an Offer in Compromise
In reality, IRS will not consider an offer in compromise if it isn’t equal to or greater than RCP (Reasonable Collection Potential). It is the measuring tool used by the IRS to evaluate the taxpayer’s paying ability. RCP is the value realized from the taxpayer’s assets including his real estate property, bank accounts, automobiles etc. Also included in the RCP is the anticipated future income of the taxpayer minus his living expenses.
An offer in compromise can only be accepted by the IRS under these three circumstances:
1) Uncertain Liability:
If you wish to learn how to get an offer in compromise approved, you must know that your offer will only be considered eligible and acceptable by the IRS if there is an uncertain liability. A doubt as to liability means that there is a dispute as to the accurate and genuine amount of tax debt to be paid by the taxpayer under the law.
2) Uncertain Collectability:
Another condition under which one can find the answer to how to get an offer in compromise approved by the IRS is if you are able to show that there is uncertainty that the amount in taxes owned are fully collectible. In such a case where the taxpayers; income and assets, are less than what he/she owes as tax liability, IRS may consider an offer in compromise, also known as doubt as to collectability.
3) Effective tax administration
Lastly, IRS may consider your offer in compromise acceptable if it is based on effective tax administration. Under this condition, there is no certainty that the amount owned is legally payable or whether the amount owed can be collected. Under this kind of offer, the taxpayer requests the IRS that he/she is already faced with economic hardships, and paying money as taxes will only add to the burden. The IRS under such circumstances may relieve the tax pressure from the indebted person based on his poor finances and promised future income growth.
What are the terms and conditions of the Offer in Compromise?
Before we head on to how to get your offer in compromise approved, there are some important things to consider such as the terms and conditions set by the IRS to make your offer in compromise eligible.Before you learn how to get an offer in compromise approved, you must understand what you are agreeing to when presenting an offer in compromise. Below is a list of things you are agreeing to do when settling an offer in compromise with the IRS:
- You are agreeing to pay the amount you have offered in the offer in compromise.
- You are agreeing to pay all your taxes on time for the next five years and also agreeing to file your tax returns on time.
- You are agreeing that the IRS can keep any payments, tax refunds, and credits that were applied to your tax debts before you submitted an offer in compromise.
- Lastly, you are also allowing the IRS to hold on to any tax refunds that were payable to you during the year your offer in compromise is approved.
If you comply with all these conditions set by the IRS and are prepared to obey them, only then you must submit your offer in compromise to the IRS.
When is the Best Time to File an Offer in Compromise?
Many taxpayers underestimate the importance of right timing to submit their offer in compromise. To understand how to get an offer in compromise approved, timing is a critical aspect. Submitting an offer very close to the date of limitation stature will be of no use as the IRS will definitely reject it then. Likewise, there are times when making an offer in compromise may land you with good chances of success, so make sure you are submitting the offer in compromise when the time is right!
You have lower monthly Cash Flow:
In order to accept your offer in compromise appeal, the IRS needs to ensure that you don’t have sufficient income or assets to pay off your tax debts in the time period allotted for collection. The lower your monthly capital (cash flow), the better your chances that IRS will accept the amount you proposed in the offer. For every surplus $100 you have at the end of the month, the IRS determines that the amount of settlement can be increased by $2,400. Therefore, make sure you submit an offer when you have the least cash flow to show.
Little equity to show as assets:
Another thing that the IRS will consider is your assets when reviewing your offer in compromise. They will determine whether these assets can be sold to pay the debt you owe. Therefore, the best time to submit a proposal of an offer in compromise is when you have the lowest equity to show in assets. In such a case, the IRS will come to terms with a lower settlement; that which you proposed. As a general rule of thumb, if you are close to selling a property at a loss or any other foreclosure or short sales, now will be the ideal time to file for an offer in compromise.
You filed for tax returns
You must be in compliance if you are considering how to get an offer in compromise approved. To be in compliance means that you must have filed all tax returns before you present an offer. It also means that you must be paying all your present dues on time and making estimated tax payments or appropriate withholdings. All those tax periods of which you owe interests, tax amount or penalty must also be mentioned in the offer in compromise. You must also be current on your tax filings when your offer is under consideration by the IRS.
How to get an offer in compromise approved?
How to get an offer in compromise approved is the most important question once you have filed for one. You want to know whether your offer will be considered eligible and taken under consideration. Therefore under this heading, we have gathered some really helpful hacks to ensure that your offer in compromise has a chance to get approved.
There may be many reasons why taxpayers demand the IRS for an offer in compromise. It is an agreement that is settled between the taxpayer and the IRS resolving the taxpayer’s liabilities for the amount he owns. If you wish to know how to get an offer in compromise approved, you must first know what forms to fill out. Follow the tips mentioned below and prepare yourself for a compromise with the IRS.
Ensure that your assets + income amount is of a realizable value:
The amount you wish to be accepted by the IRS must be equal to a realizable value of your future income amount that IRS can take as payment and current assets. Furthermore, ever since IRS started its Fresh Starts Initiatives, it now looks at only one year of your future income for your offer instead of four to be paid in the coming four to five months. If the offer can be paid off in 24 or more months, the IRS looks at two years only instead of five years of your future income.
Make sure to file back all your tax returns beforehand:
Another great tip on how to get an offer in compromise approved is to make sure that you have filed all the tax returns you are legally obliged to fill out beforehand. Offer in compromise programs are only restricted to those taxpayers who have already filed for tax returns.
Don’t try to make a DIY offer in compromise
There is a constant dispute argument whether a DIY offer in compromise is the way to go. Taxpayers think that their ample knowledge of filling out prior tax forms, limited knowledge of OIC procedures, forms and publications will be sufficient to get their offer in compromise approved. However, this is just a myth. If you wish to make an impression with your offer and are hoping for a successful response, don’t ever DIY your offer in compromise to the IRS.
Here’s why: IRS has a team of highly trained staff whose most renowned skills include persuasion, communication and pressurizing the taxpayers. They are continuously trained to be smart and are not intimidated by anyone unless they have a valid point to make. IRS also has a pool of experienced tax advocates and advisors who look after each offer in compromise case in depth, making sure no one gets off free. Your best bet is to hire a tax attorney/lawyer, as you have little to no chance of winning or pleading your case on your own. A professional with ample knowledge and expertise in the area will better protect your rights as a taxpayer and help you wipe away a large portion of your tax debt.
Stop accumulating more tax:
In case your first proposal hasn’t been rejected by the IRs and your offer in compromise is under review, ensure that you don’t accrue more tax. But then again, putting everyone on hold while the collection period is running is not always suitable either.
If the due date of any quarterly estimated tax is near, you can go ahead and pay it, do not wait for the approval or rejection of your offer in compromise. IRS doesn’t appreciate that people add more to their taxes while your offer is in pending and if you are found accumulating more tax debt, chances are your offer in compromise will be rejected.
Before offering compromise, do your due diligence
If you wish to learn how to get an offer in compromise approved, you must make sure that you are done with your due diligence. Before you submitting your offer in compromise appeal in front of the IRS, you simply can’t expect IRS to accept your offer if you have submitted a frivolous settlement application with bawling numbers on the form. Every single digit you include in the form, you must attach all related document to support your claim. The IRS offers three months for documentation which should be considered enough. All taxpayers must make sure they have all the requested and supporting documents attached or else the offer will be rejected before even moving forward for consideration. In case it gets rejected the first time, the taxpayer will have to start all over again with the procedure, document collection and will also have to pay the down payment and application fee again.
Present Non-Refundable Payment along with Application
Another thing you need to consider as a taxpayer to make sure your offer in compromise gets approved is attach a non-refundable payment along with the initial application. This is a very crucial step and therefore, must not be forgotten. The payments you make initially along with the application fee will directly be applied to your tax liability. You can then specify which tax year and debt you wish to repay first.
Now is not the time for stalling:
Many taxpayers wait before submitting an offer in compromise because they wish to have money at the time. Contrary to what taxpayers believe, this is not a smart move. All tax professionals know that the best time to submit an offer in compromise is when the settlement petitioner is at his very low in terms of finances, future proposed income and assets. It is the time to borrow money from your family and friends. Always remember, if the IRS suspects a sudden increase in your income or any money you have received through inheritance, when your offer in compromise is under review, IRS has the right to change the terms of your offer in such a case. Therefore, unless you don’t wish to have your offer rejected, it is best that you don’t stall for any money before submitting your offer in compromise.
Give them an offer they can’t refuse:
What IRS really wants from you is to have a genuinely good reason as to why you won’t be able to pay the taxes you owe in full. They will not suffice for just any reason, therefore, you must come up with a reason they can’t refuse or reject. If you think a good enough reason to have yourself relieved from your taxes is because of recession that lost you many priority clients, we say you think again.
Such claims will be rejected as there is a possibility that your business may once again reach for the stars, you just don’t know it yet. So if you are really hoping to get your offer in compromise approved, reason like disability, dependent care, substance abuse issues, huge balances and limited income due to serious health problems or advanced age are the sort to go for. But remember, tax professionals at IRS are trained to evaluate such claims; therefore you must have documented evidence to support your claim, mere words won’t just cut it!
These were some of the tips on how to get an offer in compromise approved by the IRS. If you are still perplexed on how to get an offer in compromise approved, it is advisable that you take help from a tax attorney and let him/her handle your case. They are the experts and know what they are doing. With their help, you can end up getting a much better offer in compromise prepared and approved, than the one you had anticipated getting on your own.