Offer in Compromise refers to a program the Internal Revenue Service offers to taxpayers, which allows them to settle tax debts for less than the actual amount that is owed. Those who have the ability to pay the taxes they owe through an installment agreement or by some other means typically will not qualify under this program in a majority of cases. In order to qualify for an Offer in Compromise or OIC, the taxpayer must be current on all tax returns, must have made all required estimated tax payments for the current tax year, and made all required federal tax deposits for the current quarter if the taxpayer happens to be the owner of a business that has employees.
Generally speaking, the IRS will not accept an Offer in Compromise unless the payment offered by the taxpayer is equal to or higher than what is known as the reasonable collection potential. This is how the IRS measures your ability to pay the tax debt. This assessment looks at the value of the taxpayer’s assets including but not limited to real estate, vehicles, bank accounts, etc. In addition to that, the IRS will also look at your anticipated future income after taking into account basic living expenses.
This program was created by the IRS to allow taxpayers to settle any outstanding debt they may owe for an agreed-upon amount that is lower than what was originally due. The IRS offers this program because it is aware that many taxpayers are unable to pay their tax liability without creating significant financial hardships for themselves and their family members. When you wish to avail of this opportunity, there are certain steps you need to take.
First, you must submit an application, which shows that you are in a position of financial hardship. If the IRS determined that you cannot afford to make payments to resolve your tax debt without incurring financial hardship, they will accept your offer. But, this is not a simple or easy process. The status the IRS confers on you with this program is only temporary. And that means your income will be frequently scrutinized to ensure nothing has changed and you still cannot afford to pay your tax debt.
Your Virginia tax lawyer will guide you when it comes to the necessary forms that must be files including the Form 656, the OIC form needed to make the offer; Form 656-A, the form that is submitted to waive application fees due to your income level; Form 433-A, which the IRS uses to determine your financial hardship; and Form 433-B, which is essentially a financial statement form. Businesses also file a similar form (433-A).
Applicants who attempt to utilize this program are put through a rigorous process before their applications are approved. Your finances will be thoroughly investigated to ensure that you are truly unable to pay the entire debt. Your forms and submissions must be thorough in order to be approved for an OIC. This means you cannot have any missing tax returns and you certainly need to have all your financial information in order. If your OIC application gets rejected, you can file an appeal within 30 days of the date on the rejection notice. The appeal letter must specifically address the issues raised in the rejection notice. You may also have to provide additional supporting documents to make your case. If your appeal is accepted, you may be able to renegotiate your offer.
Whether you are applying for an OIC or filing an appeal, our Virginia tax lawyers can help you. Call us to schedule a free and comprehensive consultation.