One program the IRS offers to help those who cannot immediately pay their tax in full is the “offer in compromise” (or “OIC”) program. The OIC program is the IRS’ recognition that you cannot “get blood from a turnip” and if you really cannot pay your taxes, the IRS is willing to accept in lieu of full payment the maximum amount it thinks it can reasonably expect to collect from you over the next few years. In other words, if you can demonstrate to the IRS that you cannot pay your taxes in full, the IRS will accept a lesser amount as long as that lesser amount represents the maximum amount the IRS reasonably believes it can collect through forced collection measures. The goals of the offer in compromise program are: (1) collect what can reasonably be collected at the earliest possible time and at the least cost to the government; (2) resolve the delinquent tax account in the best interests of both the taxpayer and the government; (3) provide the taxpayer with a fresh start provided the taxpayer remains compliant with his/her tax filing and payment obligations; and (4) access for collection purposes assets that may otherwise be beyond the reach of the IRS.
1. OIC Prerequisites. In order to qualify for the offer in compromise program, one must meet certain prerequisites. First, you cannot be in bankruptcy. Second, you must have filed all of your required federal tax returns. Third, you must have made all estimated tax payments for the current tax year. Fourth, if you are self-employed and have employees, you must have submitted all required federal tax deposits. Finally, a financial analysis must reveal that you are unable to pay your taxes in full.
2. Amount of Offer. Assuming you meet the prerequisites for making an offer, then you need to determine the amount of your offer. The amount of your offer is equal to your “reasonable collection potential.” In the case of a “prompt payment” offer (i.e., an offer in which you make a twenty percent down payment and agree to pay the balance within five months of acceptance of your offer by the IRS), your reasonable collection potential is equal to: (1) the total equity in all your assets plus (2) twelve times (for twelve months) the amount by which your monthly income exceeds your allowable monthly expenses. In the case of a “periodic payment” offer (i.e., an offer in which the taxpayer agrees to pay the amount offered over twenty-four months), your reasonable collection potential is equal to: (1) the total equity in all your assets plus (2) twenty-four times the amount by which your monthly income exceeds your allowable monthly expenses. In order to determine the net equity in your assets and the amount by which your monthly income exceeds your allowable monthly expenses, you must complete an IRS collection information statement (IRS form 433) which assists you in calculating these figures.
3. Offer Types. Offers in compromise come in two varieties: (1) a “lump sum” offer and (2) a “periodic payment” offer. A lump sum offer is an offer in compromise in which the taxpayer agrees to pay the full amount offered in no more than five monthly installments. In other words, the full amount offered must be paid in within 5 months of the IRS’ acceptance of the offer. Because many taxpayers do not have the means to pay the full amount offered in such a short time frame, many cannot make a “lump sum” offer. As indicated above, the advantage of the “lump sum” offer is that the amount offered is typically less than a periodic payment offer because the reasonable collection potential is calculated based on twelve times the amount by which the typical monthly income exceeds typical monthly expenses, as opposed to the periodic payment offer, in which the reasonable collection potential is calculated based on twenty-four times the amount by which the typical monthly income exceeds typical monthly expenses. The downside of a lump sum offer is that you must submit twenty percent (20%) of the amount offered with your offer and the IRS gets to keep that payment, regardless of whether it accepts your offer in compromise.
A “periodic payment” offer is an offer in which the taxpayer promises to pay the amount offered in at least 6 monthly installments, provided that in no event can the total payments exceed twenty-four (24) months. As indicated above, a periodic payment offer tends to be higher because the reasonable collection potential is based on twenty-four (24) times amount by which the typical monthly income exceeds typical monthly expenses. Note that the monthly periodic payments need not all be the same amount. Thus it is possible to “back-load” a periodic payment plan if necessary. Generally we do not encourage “back-loaded” periodic payment offers because we believe that the taxpayer should not commit to a plan that requires improved cash flow in the future to succeed. That said, there are instances in which a back loaded periodic payment plan is appropriate. Note that once you submit a periodic payment offer, you must begin making the periodic payments at that time. In other words, the taxpayer must make the periodic payments promised in its proposed offer in compromise even though the IRS has not accepted the offer. If you miss a monthly payment, the IRS may return your offer as unprocessable. If the IRS ultimately rejects the offer, it still gets to keep the payments the taxpayer made while the IRS was processing the offer. The taxpayer can, however, designate how the IRS applies the payment, which can be helpful in a case where employment taxes are the taxes that are the subject of the offer in compromise.
4. Submitting an Offer in Compromise. Assuming that you are a viable offer candidate (determined after completing IRS form 433), the next step is to submit the actual offer in compromise. The taxpayer submits his or her offer using IRS form 656. The taxpayer indicates on form 656 the taxes to be compromised (be sure to include all outstanding tax liabilities), the amount offered the type of offer made (i.e., “lump sum” or “periodic payment”). Note that the form 656 includes a number of terms and conditions to which the taxpayer consents that are important. Foremost is that the taxpayer agrees to remain strictly compliant with all tax filing and payment obligations for a period of five years. If you do not think you can meet this requirement, then you probably are not an offer in compromise candidate because if you fail to meet all your tax filing and payment obligations during the five year period, the IRS will rescind the offer and you will be back to square one. The purpose of the offer in compromise program is to bring taxpayers “back into the IRS fold” and it the taxpayer is not compliant after making his or her offer in compromise, then that purpose has not be advanced, warranting rescission of the offer in compromise. Other important conditions include: (1) authorizing IRS to keep any refund that would otherwise be paid to you through the year in which the offer is accepted and (2) extending the statute of limitations during which the IRS can collect your taxes for the time it takes the IRS to review your offer plus one year. On the positive side, the IRS will agree not to levy on your assets while it is considering your offer unless it believes that collection of taxes owed is in jeopardy. In addition to form 656, the taxpayer must also submit the completed form 433, the application fee (which can be waived if the taxpayer meets certain criteria) and the required payment (either 20% in the case of a lump sum offer or the first installment in the case of a periodic payment offer).
Overall the IRS offer in compromise program is a good program and sound governmental policy. While it is not for everyone, it represents a nice alternative to qualifying taxpayers. Louis Wooten of the Wooten Law Firm has been assisting taxpayers for years with preparing and submitting offers in compromises to the IRS. Over the years he has achieved many successes for his clients. If you owe taxes and cannot afford to pay them, contact Louis Wooten at the Wooten Law Firm to see if he can help you settle your tax debts with the IRS through an offer in compromise.