Thanks to many extenuating circumstances, such as The Great Recession and the fact that millions of American citizens are living abroad and not paying taxes, the IRS has every incentive to collect what’s owed to them. They’re even willing to strike a deal, in some cases, as can be seen with the offer in compromise program.
What Is An Offer In Compromise?
An offer in compromise is a program offered by the IRS, under the code 26 U. S. C. subsection 7122, which allows certain qualifying individuals to negotiate an unpaid tax debt for less than the owed amount. An offer in compromise is offered when it seems in the best interest of both the taxpaying individual and the IRS.
Qualifying For An Offer In Compromise
Before the IRS can consider an offer in compromise solution, first it must be determined whether or not an individual is eligible.
The IRS considers four main qualifiers, to determine eligibility, which are:
- Ability to pay in a timely manner
- Gross Income
- Total Expenses
- Assets and equity
The IRS will consider an offer in compromise if it seems like it will yield the most possible money in a reasonable amount of time.
The IRS asks that you consider all other payment options, before filing for an OIC.
Some questions to ask yourself, to help determine if you are eligible for the OIC program:
- Are you in the middle of an ongoing bankruptcy procedure?
- Have you filed all mandatory tax returns?
- Have you paid all required tax payments?
- If self-employed, with employees, have you submitted all necessary tax returns?
Getting clear on what the IRS expects will help save valuable time, energy, and resources when filing for an offer in compromise.
Benefits Of An Offer In Compromise
There are several benefits to opting for an OIC:
- Reduction of taxes owed: The first and most obvious benefit of an OIC is that the taxpayer is not required to pay the full amount owed, which can mean MAJOR savings, in some circumstances. If accepted, however, the taxpayer may be expected to pay the OIC balance in full, so make sure you have the money before beginning proceedings.
- Protections for lien and levys: The IRS has the power, and the right, to freeze all of your assets, including your bank account, over back taxes owed. If the situation remains resolved, the IRS has the full right to liquidate assets, including selling your home. Liens and levys can be seen on your credit report, as well, making future financial arrangements difficult.
- Easy payments: In the instance that a taxpayer is not required to pay the lump sum, in full, when the OIC is accepted, they may have the option to pay in easy to manage installments. The IRS accepts payments of 20% of the total owed bill.
Offers In Compromise More Accessible Than Ever
Although OICs have been available for decades, struggling taxpayers have had difficulty taking advantage of the program, due to strict criteria. As of 2014, however, the IRS has lowered their standards significantly, refactoring the reasonable collecting potential, or RCP, to be more inclusive. Other factors are also being taken into account, when calculating RCP, such as age, health, marital status, number of dependants, education, and occupational training.
Some benefits of the new RCP definition include:
- Net realizable equity in assets is determined by quick sale value. Quick sale value is usually determined as 80% of fair market value
- If a taxpayer’s vehicle is used for work, $3,450 may be deducted from its quick sale value
- If a taxpayer is self-employed, the income average may be determined by an average of 3 years earnings, if it is less than the current year, due to fluctuations
To learn more about offers in compromise, or talk to one of our tax professionals, contact us today!