An Offer-in-Compromise (OIC) is a tax settlement agreement used to reduce the taxpayer’s debt to less than the full amount owed to the Internal Revenue Service. An “Ability to Pay” formula is used by the government to determine a taxpayer’s ability to pay their tax debt, based on allowances for basis costs of living, anticipated future income, and any exceptional circumstances. Unless the offer amount in compromise is equal to or greater than the reasonable collection potential (RCP), it is unlikely the IRS will accept the offer. RCP is how the IRS determines the taxpayer’s ability to pay their tax debt and includes an estimated value for the liquidation of taxpayer’s assets such as their home, autos, investment accounts, etc. If the IRS determines the tax liability can be paid in full through a repayment plan or IRS installment agreement, chances are you won’t qualify for an OIC. Call us today at (925) 626-4900 to learn more and receive a free consultation.
The Internal Revenue Service may accept your OIC if requiring repayment of the tax debt would cause an inequitable financial hardship. If the IRS accepts your Offer in Compromise, you still must fulfill the terms of your agreement to include:
- Pay the OIC Amount – It is imperative that you pay the IRS the amount that you offered in lieu of a much larger potential tax debt. There are two types of OIS’s: 1. Lump Sum OIC – Pay 20% of the offer amount with submission of the offer and pay the balance off in a maximum of 5 months. 2. Short Term Deferred OIC or Periodic Payment OIC – 20% down payment with the offer and payments between 6 months to a maximum of 24 months to full pay the offer amount.
- File Taxes On Time – For five years, you must file your taxes on time or properly file for an extension, and then file by the agreed date.
- Pay Taxes On Time – For five years, you must pay your taxes on time or properly file for an extension, and then pay your taxes by the extended date.
- Make All Estimated Payments – If you are self-employed, you will likely be required to make estimated tax payments throughout the tax year.
- Forfeit Tax Refunds to IRS – The IRS will claim any money due as a tax refund for the years in question and the year of the Offer in Compromise.
A delinquent taxpayer may elect to pay the OIC in a lump sum payment or through an IRS Installment Agreement plan. Federal law defines a “lump sum” offer as a payment plan for tax debt that can be resolved in five or less installments. The taxpayer must submit a properly completed Form 656 and include a non-refundable payment equal to 20% of the Offer in Compromise. If the Internal Revenue Service does not accept the taxpayer’s OIC the non-refundable payment is applied to the individual’s tax liability and their tax debt is reduced. When the taxpayer submits an OIC with a periodic payment offer, a payment equal to the proposed IRS installment agreement is included with the taxpayer’s completed Form 656. Both the lump sum Offer in Compromise and the periodic installment plan OIC require a $150 application fee that is also non-refundable. Contact Dana & Fullam today at (925) 626-4900 to see if your situation qualifies for an Offer in Compromise.