How Can Offer In Compromise Help You with Tax Debt?
It can be way too easy to get behind on any debt. One bad week or month can throw you off completely, leaving you with not only late payments but unnecessary interest.
For many debts, this isn’t too big of a deal. I mean, yes, you still owe money and you risk that late payment going on your credit. None of that is ever good, of course, but there is a debt that outweighs others: tax debt.
When you are behind on tax debt, you risk a lot more than unnecessary interest and your credit. You’re dealing with the government, and they have power that other creditors don’t.
They can take your home, seize your assets, garnish your wages, take any future tax refunds, restrict your passport, and more. It’s really not something you want to deal with, so it’s important that you take care of any tax debt you might have as quickly as possible.
How Can Offer In Compromise Help You With Tax Debt
The question you might be asking is how you can take care of tax debt when you don’t have the money to do so. There are a few options available, one of which is called an offer in compromise. This guide will provide an understanding of this option, eligibility requirements, and alternatives if an offer in compromise doesn’t work for you.
What Is the Offer In Compromise Program?
The Offer In Compromise program is one in which the IRS accepts less than you owe on your tax debt – often for a much lower amount. It was developed for people who either cannot pay the full amount they owe or for those who – if they did pay the full amount – would face serious financial difficulties.
How Does it Work?
Offer in compromise is basically a settlement – like the ones you might receive from other creditors in the mail. You know the ones – they’ll say something like, “Our client has given us permission to accept $ XX to cover your debt in full. That’s a 45% discount!”
Offer in compromise is very similar, but there are differences. One of the biggest is that the IRS doesn’t bring you the settlement offer. You take the settlement offer to the IRS.
You fill out the forms that say – in essence – “Hey, IRS, I can’t pay everything I owe. Instead, I can pay $ XX amount.” If the IRS feels like it’s the most they can reasonably expect to get, they’ll accept.
Let’s break it down a little more
Let’s say you and I are friends, and during our friendship, you’ve borrowed $1,000 from me. You’ve experienced a lot of financial struggles, so you really haven’t been able to pay me back. If you did make any payments, it was $10 here and there.
I’ve been understanding up to this point, but I’m getting a little irritated and a little desperate myself. Maybe my bills are getting behind or I’m getting ready to send my child off to college. I need to get that money back, so I’m starting to think about suing you for what you owe.
You really don’t want to go to court – or lose our friendship, for that matter. You run some calculations, come up with some ideas, and hit me with a deal: “Listen, I really can’t pay you back that full $1,000, but I have come up with a way I can pay you back $400 over the next five months. I can even give you the first $50 today. Can we call it even?”
This may not seem like a fair deal, since I would be losing money. However, I really don’t want to go to court, either. If we do, I’ll end up losing more money on court costs. And there’s no guarantee I’ll be able to get the rest back, anyway. To save time, money, a headache, and our friendship, I agree to your deal.
I know what you’re thinking: I’m not friends with the IRS agents. Why would they be interested in saving our relationship?
You’re right, they’re probably not. However, they really don’t want to go through all the necessary proceedings to garnish your wages, take your home, or whatever other actions they are considering. No one wants the hassle, so if your offer is worth it, they’d typically rather settle with you.
Eligibility Requirements for an Offer in Compromise
It’s important to understand that not all offers get approved. There are guidelines the IRS goes by to determine whether or not your offer is worth it. If you don’t meet those guidelines, you can be pretty sure that your offer In compromise will be rejected.
So, what are those guidelines? Let’s take a look:
☛Their Collection Statute of Limitations
The IRS has a set period of time it can collect a tax liability. Typically, this is 10 years. Under some circumstances, that may be extended for two to four more years. Generally, though, the IRS cannot come after you for anything past that 10 year mark.
The reason this matters here is because they take the amount of time they have left into account. So let’s say the tax debt is from five years ago. That leaves the IRS five years to collect it.
As they do their calculations, they’ll determine how much you can reasonably be expected to pay over the five years they have left. They will figure this out by considering the things listed in the next section.
☛Your Ability to Pay
To determine if you qualify for an OIC, the IRS needs to determine whether you can pay the full amount – and if you can’t, how much you can afford to pay. They’ll do this by taking the following into account.
1. Your Income – Current and Potential
One of the biggest things the IRS wants to know is how much income you have coming in. They’ll calculate everything from your regular paycheck to investment and rental income. If it’s coming into your household, it counts.
There can be exceptions, though. For example, if your child has a part-time job, their income probably won’t count. Or if you are letting your brother live with you for a while, but his bills and income are separate from yours. However, if you’re charging your brother rent while he stays there, it’s considered income.
And keep in mind that it’s not just how much you make now. It’s also about how much you are expected to make over the time they have left to collect. You might be wondering how they could figure that out, so let’s run a scenario or two.
Scenario 1: You are settled into your career and there are no foreseeable changes to your income. In this case, the IRS would probably just calculate your current income as what you’d make over the next few years.
Scenario 2: You have just finished a Master’s Degree program and are getting promoted at your job. In this case, they would expect you to make more money.
The question on your mind right now is probably something like, Yeah, but how exactly would they know if I’m finishing a degree or getting promoted?
The answer is that the paperwork for an OIC is extensive, and they investigate your situation before approving or rejecting it. They are going to find out what they need to know before accepting less than you owe.
It may seem unfair that they count your future potential income, but let’s go back to our example above. You owe me $1000 and are offering to settle it for $400 over five months.
I might decide that it’s fair if it doesn’t seem like anything will get better in your financial situation. However, would it still be fair if I knew you were getting a tax refund, an inheritance, or selling some property over the next six or seven months?
No, because I could get the full amount you owe. I wouldn’t settle for $400 if there’s a high potential of getting the $1000 soon – and neither will the IRS. And if you really think about it, you probably wouldn’t either.
2. Your Expenses
Your income is only a portion of the equation. The IRS also takes your expenses into account – but only certain expenses. They typically only consider food, clothing, and similar items according to National Standards and housing, utilities, and transportation according to Local Standards.
Basically, they calculate your expenses according to how much the average person should be spending on basic living expenses. This means that making payments on five different vehicles, having a serious shopping problem, and being backed up on credit card bills from vacation won’t help your cause.
Additionally, there are other expenses that typically won’t count. For instance, college and private school expenses and even retirement contributions aren’t considered “basic living expenses,” so they won’t help you qualify.
Now, what if your basic expenses go beyond the National and Local Standards? That’s a different story. They’ll take such facts into consideration with expenses that you have to cover to survive. You’ll just have to be sure to turn in this information.
3. Your Assets
Any assets you have also play an important role. What type of assets? Anything, really. If you own anything that is considered an asset, it will be figured into the eligibility calculations. This might include:
- Equity in your home
- Contents of your safety deposit box
- Vehicles
- Copyrights or patents
- Investments
- Trusts, estate, or insurance policies on which you are named beneficiary
Other Factors to Consider
In some cases – regardless of your ability to pay – you’ll be wasting your time with an offer In compromise. This is not to discourage you. It’s just that some things automatically disqualify applicants.
These include things like being in bankruptcy, not having filed all of your required tax returns, or owing other delinquent taxes that aren’t included in your offer.
In any of these cases, your offer will be rejected, so you’ll need to consider other options for settling your tax debt. We’ll go over those options below.
It’s also important to note that an offer in compromise might be accepted if there is doubt as to whether you owe the taxes you are being charged. This is a very rare situation, but it does happen.
If you feel as though you are being charged unfairly, consider an OIC – but don’t do it on your own. Get legal help to take care of this so you can ensure it’s taken care of properly.
How Do I Submit An OIC?
If you feel like an offer in compromise is right for you, it’s time to prepare for the process. Let’s walk through the steps one by one.
1. Think It Through
An OIC might seem like the best move for you, but you need to think this through carefully before submitting an offer. Don’t make this move out of desperation because it’s not all milk and honey. There are downsides.
One is the potential of paying more than you offer – even if your offer is approved. For example, let’s say that you submit an offer to pay $1,000 to settle a $10,000 tax debt by June 2022 and the IRS accepts.
Now, when you file your taxes, you find you are supposed to get a $5,000 refund. Good for you – right? Not so much. The IRS will likely take this full $5,000 to apply towards your whole debt – and it won’t even count as a payment on your offer.
In other words, you’ll be paying $5,000 in addition to the $1,000 you offered to pay. As long as you are still paying for your offer in compromise, the IRS can take your refunds. Consider such things before deciding to submit an offer.
Also, seriously consider how much you can afford to pay without anyone going hungry. Keep in mind, though, that your idea of necessities and the IRS’s idea of necessities may be different.
2. Pre-qualify
Before you get too deep into the application process, you want to be as sure as possible that you qualify. Fortunately, the IRS makes this a bit easier. Start by using their offer in compromise pre-qualifier tool.
3. Download the Forms
The IRS provides an offer in compromise booklet that provides both the forms you need, step-by-step instructions, and additional information.
4. Submit Your Application
After filling out your forms, it’s time to submit your application along with the application fee. That fee is currently $205 and is non-refundable. If you meet the Low-Income Certification requirements, that fee is waived.
5. Submit Your First Payment
You’ll need to send in your first payment with your offer. That payment will depend on the option you choose from the following:
Lump-Sum
This is when you send in 20 percent of your total offer, paying the remainder of your offer in no more than five additional payments.
Periodic Payment
This is when you agree to pay a certain amount each month until your total offer is paid off. For instance, you offer to pay $100 each month until your total offer is paid. With this option, you must be able to pay the full offer within 24 months, and you would send in the first $100 payment with your OIC.
If your offer is rejected, you won’t get those initial payments back. It will be applied to your total debt.
Also, it takes some time for an OIC to be processed. While you’re waiting for an answer, you have to send in the payments you offered.
In other words, even if you wait six months for an answer to your offer, you still need to make the $100 monthly payments. And none of these are refundable.
On one hand, it helps you pay down your debt. On the other hand – if you’re scraping the bottom to make those payments – you’re putting money you need for other things toward something that may not be approved.
Again, I’m not saying this to talk you out of it. I’m saying that you should think it through carefully and consider all of your options.
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Alternative Ways to Address Tax Debt
There are a few other options for paying off your tax debt, including:
Use Your Assets✔
I know that cashing in investments or selling cars or property doesn’t sound like fun. However, if you have enough assets put away to cover your tax debt, this might be a good option. Remember, the IRS can seize your assets, if they choose, so they’re kind of at-risk anyway.
Talk to the IRS✔
You might be able to speak to an IRS agent about getting a lower balance or paying a set amount of lower payments to fulfill your debt. At times, they might take off some of the interest you owe or work out a payment plan with you. It’s similar to an OIC but not the same – and it never hurts to ask.
Debt Settlement or Consolidation Companies✔
Debt Settlement or Consolidation Companies There are companies out there that can help you get out of debt through various means. Sometimes, this includes tax debt. Other times, it means clearing up other debt so you have more cash to put towards your IRS debt.
It’s important to be careful with this, though, as there are plenty of unscrupulous companies out there. Good news, though: we’ve done the research for you.
Conclusion
An offer in compromise is a great option for those who owe debts but cannot pay the full amount. However, not every offer is approved and it does come with downsides. Before you jump in head first, be sure to do additional research, use the Pre-Qualifier tool, and carefully consider all of your options.