If you are faced with tax problems, you’ll need to determine if you want to seek professional help when dealing with the IRS. You always have the option of representing yourself in front of the IRS, but there are many disadvantages to you representing yourself.
1. You do not have the professional expertise to know what the options are to get the lowest settlement.
2. Four out of five Offers in Compromise submitted by taxpayers are rejected by the IRS.
3. You may end up being to frighten, frustrated or intimidated by the IRS to effectively negotiate a settlement.
4. Most taxpayers are far happier to keep their distance from the IRS and prefer to leave the sparing to someone else.
5. You may slip up and make a statement that may make matters worse.
6. Negotiating with the IRS takes time away from your business and family
Working with a professional may be a much better option!
The IRS is allowed to forgive all or part of your tax liability and reach a settlement with you that is less than what you owe. An offer in compromise, or OIC, is what we use for this.
The IRS Offer in Compromise (OIC) program has historically been a source of much controversy and misunderstanding. Over 20 million individual and company taxpayers currently owe the IRS money, but few of them receive an OIC.
There are 3 categories of OICs:
A tax agreement known as an OIC for Doubt as to Liability occurs when the taxpayer contests the tax amount.
A tax settlement known as an OIC for Effective Tax Administration occurs when both the taxpayer and the IRS concur that the tax owed is accurate and capable of being paid in full. However, the taxpayer asks for a settlement for less than what is owing because paying the tax would be difficult financially or because public policy or equitable issues make paying less than what is owed justifiable.
A tax settlement known as an OIC for Doubt as to Collectability (OIC-DATC) is made when the taxpayer’s financial status prevents them from paying the remaining debt owed with assets and future revenue.
The most widely used OIC is by far the OIC-DATC. It has been the focus of numerous radio and television advertisements over the past 20 years that say people can settle their tax burden for “pennies on the dollar.” In fact, OIC Mills is among the top ten tax frauds for 2020 according to the IRS.
beware, OICs are uncommon.
Tens of thousands of taxpayers attempt this IRS collection strategy each year, but relatively few are successful. In fact, more than 16 million individual taxpayers owe the IRS money, but only 25,000 of them received an OIC in 2017. 33% of all OICs were accepted by the IRS in 2019. The IRS only authorized 531 ETA OICs in 2020.
The majority of people would be better off asking for alternative IRS choices, such as IRS payment plans or “currently not collectible status,” which is when your authorized expenses exceed your monthly income. Liability disputes are frequently resolved through IRS appeals or during audit reexamination. The most typical OICs are those with doubts about their collectability.
Why Would the IRS Reject an OIC?
The IRS might reject your doubt regarding the collectability of your OIC for one of two basic reasons:
- You are not eligible.
- You are unable to make the calculated offer payment.
How does the IRS contest an OIC application with a temporary financial situation?
The IRS may use a person’s predicted amount of income when fully employed to determine how much they may pay, therefore those in temporary situations or even underemployment are typically not ideal OIC candidates (if the potential for employment is apparent).
Earners must provide their average, regular monthly income over the previous three months on the OIC application. If you demonstrate a low income over the previous three months while completing the application, you might be eligible for an OIC (and likely a low offer amount).
The IRS offer examiner might respond, however, by estimating your future income and suggesting that you demonstrate your typical income over a longer, more normalized period, such as one year or more. By raising your anticipated future income, this average can boost your ability to collect.
However, it could be a good idea to take a closer look at the OIC option if the income loss appears to be permanent (for instance, if you lost your business, retired, are unable to work due to bad health, or are likely to be unemployed).
You must demonstrate your inability to pay
You must demonstrate to the IRS that it can’t collect all of the taxes you owe before its time runs out in order to qualify for an OIC based on “doubt as to collectability,” To the IRS, this means that you owe, but you don’t have the money to pay. The collection statute expiration date is when the IRS has 10 years from the date it “assesses” your taxes to charge you with them.
Unless you have a unique case that justifies an OIC, you would need to refute the OIC examiner’s claims by demonstrating that your circumstance is ongoing. If you are unable to demonstrate how your income will remain low, you may not be eligible for an OIC or you may be presented with an offer that is too high to accept in order to pay your tax debt.
OICs might become challenging
Even if you are eligible for an OIC, you must still be able to pay the required amount to pay the tax obligation. It is referred to as the “offer amount.” This sum frequently is greatly influenced by the value of your possessions. Those who have accrued equity in their homes or 401(k)s can be required to pay the IRS a portion of their “net equity” in these assets as part of their offer amount.
To establish the amount you can pay the IRS in the future and your offer amount to settle, you will also need to analyze your assets, liabilities, income, and spending. Calculations involving OIC can be challenging. They concern IRS financial analysis guidelines, such as what assets are included and excluded, as well as the taxpayer’s permissible average expenses. Taxpayers can get assistance with the calculations and considerations from Internal Revenue Manual section 5.8.5, IRS Form 656-B, and the offer in compromise pamphlet.
The sum of the offer also accounts for the monthly payments that the IRS will get over time. The length of time depends on a number of variables, including the IRS’s ability to collect and the manner you choose to pay the offer amount.
A tax professional can help you to figure out your assets, liabilities, income, and spending as well as other elements that decide whether you qualify.
If you are eligible, your tax professional can figure out how much your offer should be and work with the IRS so that you can ask for the OIC. If not, your tax expert can assist you in making the appropriate IRS payment agreement request for your circumstances.