The most heavily marketed IRS collections program involves the Offer in Compromise. Generally, this is based upon “Doubt as to Collectibility”.
So, let’s say however that you do have a viable offer and after doing all the calculations, the Offer amount is $10,000.
How does the Offer in Compromise proceed and what are the steps?
- Form 433-A and Form 656 (Offer in Compromise application) will be submitted along with all required bank and income records;
- You must pay a filing fee of $186 along with a 20 per cent deposit of the Offer, which in the case of a $10,000 offer would be $2,000. By way of explanation, this deposit is non-refundable, and if your Offer is later rejected, then it will not be returned to you, but rather will be applied to your tax debt;
- Once the Offer has been received, all IRS collections activity will be suspended, and there will be no wage garnishments or bank levies during this time;
- You will wait, and wait and wait, usually around 6 to 12 months while the Offer in Compromise reviewer assigned to your case will verify your information;
- Often, the OIC reviewer will reject your Offer, but indicate that based upon their review, they would be willing to accept a higher amount. If so, then you can choose to accept that counter-offer;
- If your Offer is accepted, then you will have 5 months from the date of the acceptance to pay off the remaining amount of your Offer. (Note that some offers are done with a 24 month payment plan, but it has been my practice that clients have preferred to opt for 5 month payment amounts;
- In the first year following your Offer acceptance, the IRS is entitled to retain any tax refunds to which you might be entitled. For subsequent years, those refunds will be your property;
- Most importantly, you will be on “tax probation” for 5 years, which means that you must file all of your IRS returns on time, and not have any IRS balances owed. This is crucial, because if you do not comply with the filing and payment requirements, then the IRS will retroactively revoke your original Offer!! Yes, I have heard the sad cases involving taxpayers who fell behind in either Year 4 or 5 following their Offers and wound up having their Offers taken away.
Is the Offer in Compromise a Negotiation?
In short, this is not a “negotiation” with the IRS. This is a long (6 to 12 months usually) process, but one in which other IRS collections will be stopped while the Offer review is being completed.
In other words, the IRS will review all of your equity assets (cars, real estate, retirement accounts, bank accounts, etc), as well as your monthly income and expenses. That review is done by completing IRS Form 433-A and disclosing all of that information along with statements from all of your various bank and investment accounts as well as loan statements.
The OIC process is not based upon fairness, but rather upon collectibility of your tax debts. If you have high monthly payments for car loans or your mortgage, then the IRS will not permit it, and will want that money for their Offer calculations.
Not everyone is a good candidate for an Offer in Compromise. For example, if you owe $50,000 to the IRS, and you have a 401k balance of $75,000, then the IRS will simply say that you should withdraw their money from your 401k account and repay them!
Are you a good candidate for an IRS Offer in Compromise?
Generally speaking, it is best to meet with a tax professional who is experienced in handling IRS collections cases. Not all tax professionals have this type of background. If you can gather up your asset and income information, then a review of your case can be completed in one session to determine if you might be a good OIC candidate. Essentially however, the best Offers are ones from taxpayers who have experienced financial hardship of some kind, such as divorce or job loss.
If you have comments or questions, please let me know below.