If you’re unable to pay the amount of your tax debt, you may be interested in exploring an offer in compromise as an alternative. So, how often does IRS accept offer in compromise?
How Often Does IRS Accept Offer in Compromise?
Struggling with tax debt is stressful, particularly if it feels like you have no real way to pay it off. But thankfully, if you can prove that you’re in financial distress, chances are the IRS will accept a lower payment from you to resolve the debt. Getting the IRS to accept an offer like that, however, takes a lot of preparation and more than a little careful planning.
When it’s clear that paying off your debt in its entirety is impossible given your current income and asset liquidity, or if paying off your debt would put you well below the poverty line and cause “undue financial hardship”, you may be able to persuade the IRS to take an offer in compromise. This is by no means a panacea for tax debt problems, but it may be your best option if your circumstances permit it. So, how often does IRS accept offer in compromise?
What Is an Offer in Compromise?
To put it simply, an offer in compromise involves proposing a truncated payment plan to the IRS within the limits of what you can afford to pay. The IRS itself urges taxpayers to consider this a last resort when all other financing options have been explored and/or considered, and still don’t yield enough money to cover the entire debt.
To put it less simply, an offer in compromise is a potential avenue for you to explore if you meet the strict eligibility requirements set forth by the IRS. It’s a proactive option, as the procedure requires you to write and send in an offer alongside the first payment of said offer. Setting up an offer in compromise is not cheap.
There is a filing fee of $205, and you must send in the first payment of your new proposed payment plan alongside the plan itself, depending on what payment scheme you choose:
- If your plan is a lump sum plan, then you must send the first 20 percent of the proposed total payment with the offer, and pay the rest in four or five separate payments once the offer is accepted.
- If your plan is based on monthly installments instead, you have to send in the first month’s payment alongside the offer, and continue to pay every month, even while the IRS deliberates your offer.
Because of that and the fact that your debt will continue to grow should the IRS reject your offer, it’s typically unwise to try and lowball them. An offer in compromise will also require you to disclose information that they can use to figure out just how much you can really afford to pay, so don’t try to fool them.
They will use this information and anything else they know about you to determine a reasonable collection potential (RCP), and if your offer is below what they consider to be your RCP, it’s likely to be rejected.
It is important to note that if you are eligible for a low-income certification, the IRS may waive the initial payment and any subsequent monthly installments during the deliberation period, as well as the filing fee.
You will still have to pay some portion of the debt, depending on what you can afford. The IRS may reject an offer in compromise for a number of other reasons, even if you’ve proven that you can’t afford to cover the whole debt. These include:
- Filing for or being in an open bankruptcy case.
- Failing to file all required federal tax returns.
- Failing to make estimated tax payments.
- Running a business (including self-employment) and failing to submit the required tax deposits.
- There are strict eligibility requirements.
The likelihood of being rejected by the IRS goes down the more eligible you are for an OIC. While the eligibility requirements are strict and the procedure itself will require a few forms and a lot of paperwork, finding out if you are or aren’t eligible is rather straightforward. A few important things to note.
An offer in compromise is more likely to succeed if you’re being meticulous about the taxes you’re owing right now, even if you can’t pay them off. That means filing all your tax returns, declaring all your income, and remaining current on your tax payments for this year. If you aren’t current, they might not even look at your OIC.
You need detailed financial history to get them to consider your OIC. Knowing what you own and what you owe is the ABC of figuring out how much you can pay. That means:
- Bank statements
- Trusts and beneficiary accounts (and when they’re likely to pay out)
- Life insurance and retirement accounts
- Real property
- Internet domain names
- And so on
The IRS does give you a chance to accept their recommended offer if they find your offer too low. Note that this is only an option if they think you’ve made a mistake in calculating your offer – any intentionally hidden or false information will get you in a lot of trouble.
If your offer is rejected – which can happen quite often – you can either use the letter they sent to gauge a reason why and try again, or you can appeal directly to the IRS Independent Office of Appeals (within a time limit of 30 days). Low-income eligibility can be a great boon if you find yourself qualified for it.
The qualifications for low-income status are an income of 250 percent of the current poverty line, or less. Low-income individuals need not send in an initial payment or pay the filing fee for an offer in compromise (but you must continue to be up-to-date with your current tax payments).
If you wish to get started on creating an offer in compromise, be sure to read up on everything the IRS will need from you through a Form 656. Form 656-B serves as the IRS’ instructional booklet on what else you might have to consider before sending in an offer.
Included in the booklet is information on additional forms that may be relevant to your situation, including the required Form 433-A or Form 433-B, collection information statements for wage-earners/self-employed individuals, or businesses respectively.
You Can Get Pre-Qualified
The IRS has its own OIC pre-qualifier tool to help taxpayers get a general idea of what requirements they might be missing or forgetting, and what they should have at hand when aiming to negotiate an offer in compromise. Note that this shouldn’t be the end-all-be-all as to whether or not you can get an OIC.
The pre-qualifier essentially assesses your current debt and status, basic personal information, assets and income, expenses (eligible ones, as the IRS doesn’t count certain expenses such as unsecured debt payments), and your final proposal.
Strongly Consider Professional Help
Because there are so many factors to account for and because individual circumstances dictate everything when it comes to tax debt and your chances at an OIC (or any other solution), it is strongly recommended to work with reputable tax professionals who have a history of working with the IRS.
A tax professional may be able to take a closer look at your financial history and information, and give you a grounded and realistic list of options to consider and pursue to resolve your debt.