What is an Offer in Compromise?
An offer in compromise allows you to settle your tax debt for less than the full amount you owe. It may be a legitimate option if you can’t pay your full tax liability, or doing so creates a financial hardship.
According to the IRS: “An offer in compromise allows you to settle your tax debt for less than the full amount you owe. It may be a legitimate option if you can’t pay your full tax liability, or doing so creates a financial hardship.”
While the Federal Offer in Compromise program has been around for decades, political pressures effect how useful this program is in any given year. Sometimes, the Offer program is wide open and accessible to a wide range of taxpayers. . . and other times, it is nearly impossible to get even the most reasonable Offer through.
Enforcement action by the IRS is a pendulum…going from tough to easy to tough to easy again; at this time it appears they may be easing. Nowhere is this better shown than the IRS has expanded its “Fresh Start” initiative by offering more flexible terms in its Offer in Compromise (OIC) program.
In May of 2012, the IRS announced its Fresh Start Initiative -providing more flexible terms to its Offer In Compromise (or OIC) program, which helps taxpayers settle tax debts. This loosening of restrictions coincided with the period where many in Orange County were hardest hit by the recession. While the economy of Orange County did rebound faster than much of the rest of the state, our current circumstances in Orange County are still much different than before the recession. It’s more important that our neighbors have options to handle what may feel like overwhelming tax problems. There are ways to resolve your tax issues and one may be an Offer In Compromise.
How Does It Work?
While the formal Offer In Compromise process does have a number of technical aspects to it (specific forms need to be filed, documentation supplied, etc.), here’s what you need to know. Put simply, when considering an Offer in Compromise, the Internal Revenue Service is going to weigh how much you owe them against how much money you have. If the debt is greater than your assets (either current or projected), then they are willing to consider a settlement.
There’s quite a bit of nuance here, so it is important that you always consult with a professional before submitting an offer. A good starting point on your end is to just make a solid assessment of your finances. If you own a house in Huntington Beach with $550,000 in equity, but owe the IRS $23,000, the odds of them accepting your settlement are low. If you own a house in Costa Mesa that is upside down by $195,000 and you owe the IRS $250,000, well, then you may be a good Offer candidate.
Ultimately, the IRS is going to look at your assets (homes, cars, bank accounts), your income, and your expenses.
What kind of expenses does the IRS allow?
When the IRS calculates a Taxpayer’s reasonable collection potential (called RCP), it will now look at only one year of future income for offers paid in five or fewer months (down from four years) and two years of future income for offers paid within 24 months of the date the offer is accepted.
The allowable living expenses have also been expanded: Taxpayers can now include credit card payments and bank fees and charges. Student loans guaranteed by the federal government will be allowed. In addition, payments for delinquent state taxes will be allowed based on a percentage basis owed to the state and the IRS.
Finally, the Government says they are concerned about the challenges businesses face in a slow economy. To enhance the employment rate, equity in income producing assets will not be included in the calculation of reasonable collection potential for on-going businesses.
Federal Offer In Compromise
According to the Franchise Tax Board:
“If you are an individual or business taxpayer that does not have the income, assets, or means to pay your tax liability now or in the foreseeable future, you may be a candidate. The Offer in Compromise program allows you to offer a lesser amount for payment of a non-disputed final tax liability. Generally, we approve an Offer in Compromise when the amount offered represents the most we can expect to collect within a reasonable period of time.”
How We Can Help
At Wasvary Tax Services we have multiple years of experience with filing and fighting for Offers In Compromise for our clients here in california. Our expertise can help guide you in what can often seem like a totally overwhelming, perhaps even impossible, process.
Receive a FREE Consultation by filling out our online form or calling (818) 705-2822