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What are Offers in Compromise?
Offers in Compromise (OIC) are agreements between the IRS and a taxpayer to pay a certain debt. This debt is less than the actual amount owed, however, the amount is determined by the IRS. Unless special circumstances are present, the IRS will not accept an offer in compromise they believe can be paid in full through a payment agreement. Most of the time, the IRS will not accept an OIC unless it is equal to or greater than the reasonable collection potential (RCP). The RCP is the formula the IRS uses to determine how much the taxpayer can handle--factoring in assets, future income, and allowing room for basic ilving expenses. An application must be filed to be granted an OIC.
There are three types of Offers in Compromise taxpayers should be aware of:
Doubt as to Collectibility: This happens when the IRS believes the taxpayer will be unable to pay the debt within the amount of time allowed because there are no assets and income does not sufficiently cover living expenses. The taxpayer cannot pay the amount now or through monthly payments, and agrees the debt is true.
Doubt as to Liability: This happens when the IRS believes the taxpayer is not responsible for the tax debt. For example, if an employee has unpaid payroll taxes, but is able to prove he or she left the job prior to those taxes adding up, there is a doubt as to liability.
Effective Tax Administration: In this case, there is no speculation about whether or not the debt is true. The taxpayers have the means through assets and otherwise to pay the full debt, but have other circumstances preventing them from meeting the obligation. These taxpayers must prove to the IRS the debt repayment would create a hardship or be unfair. For instance, if a married couple has the means to pay the debt through equity in a home, but also is responsible for the sole care of a sick child, the equity in the home would then be necessary to cover medical bills and treatment for the child, rather than the tax debt.
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Paying Offers in Compromise
Should a taxpayer be granted an offer in compromise, he or she has three different ways to make the payments. Before electing one of these methods, a separate payment of $150 and a Form 656, Offer in Compromise must be filed with the IRS.
Lump Sum Cash Offer: This offer must be paid in five installments or less, beginning with a 20% down payment when the offer has been accepted by the IRS.
Short Term Periodic Payment Offer: This offer must be paid within 24 months of the day the IRS received the inital offer. A payment in addition to the filing fee must be received when the form is filed. Until the offer investigation is complete and approved, taxpayers must continue to make regular payments.
Deferred Periodic Payment Offer: This offer must be paid in full within the statutory allowed amount of time. A payment in addition to the filing fee must be received when the form is filed.
It is important to remember the IRS does not have to agree to the terms set forth by the taxpayer and may make adjustments where they see fit and deem necessary in order to receive payment of the debt.
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How to Avoid Tax Settlement Scams
Many lawyers are advertising they can help taxpayers with their tax debt, when in fact, the program for offers in compromise is intended to help only a small group of people. What ends up happening to the taxpayers who elect to use a lawyer to file an OIC is that they spend a lot of money on legal fees, and never actually qualify for the program. The IRS is urging people to avoid these claims to save themselves time, energy and money. Handle offers in compromise directly with the IRS to ensure no extra money is spent.
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This article is intended for informative purposes only and is not to replace the advice of a legal tax professional.