An Offer in Compromise (OIC) is often touted as a ‘get out of jail free’ card by unreliable tax relief services. Be wary of firms that offer to settle for ‘pennies of the dollar.’ An OIC will allow you to settle your tax debt liability for less than you owe, but in reality, it is a long drawn out process with a low success rate for approval.
The IRS will not accept an Offer in Compromise that proposes payment of anything less than what they consider to be your reasonable collection potential. This is calculated by determining the realizable value (how much you would earn from selling) of your assets, as well as your monthly disposable income over a period of 4 or 5 years. Also, they will only accept an OIC if it is based on one of the following situations:
Doubt as to Collectability – there is doubt that the taxpayer will ever be able to pay the full amount of tax debt owed.
Doubt as to Liability – there is doubt that the assessed tax liability is correct.
Effective Tax Administration – exists as a clause for extenuating financial circumstances. Taxpayer must demonstrate the collection of debt owed would create significant economic hardship.
Determining and proving your eligibility requires the use of complex formulas and documentation; a tax professional can help you navigate the intricate filing of an OIC. You will need to gather pertinent financial documents such as bank and income statements, vehicle titles, mortgage notes, and other bills to determine your reasonable collection potential. Along with these documents of proof you will also file Form 656 and Form 433-A, and submit payment. There is a filing fee of $150 due at time of submission. You will also need to submit a separate payment equal to your proposed monthly payment amount or 20% of your proposed lump sum. Should your OIC be refused, this money will be applied to your outstanding tax debt.
Remember that you are entering into a contract with the IRS should your Offer in Compromise be accepted. You agree to pay the amount in your offer, as well as file and pay income tax returns on time for the next five years. The IRS will automatically keep any payments, credits or refunds already applied to your tax debt prior to the approval of the OIC. The IRS has the right to revoke your Offer in Compromise at any time.