, IRED

News Home

Directories
Int'l Realty
US Realty

Making an IRS Offer in Compromise

By W. J. Fontenote

The worst has happened. Due to circumstances beyond your control, you owe the IRS a huge amount of money and cannot pay. This could easily happen if you have a business that has failed and you have no means or assets to pay your bill. Well, believe it or not the IRS has a procedure where you could possibly pay them back for pennies on the dollar. This procedure is called an Offer in Compromise (OIC) and has a very specific and defined set of rules that you can follow. One thing to note is that if you have a relatively small debt, you should probably set up an installment payment with the IRS. It is much easier to do this than to prepare an OIC. Also, if you can afford it, you should hire a tax professional to do this for you since it is a very involved procedure with a lot of forms to fill out. However, you can do it yourself if you have patience and perseverance.

Do You Qualify for an OIC?

You may really want to do an OIC, but first you must be qualified. There are three conditions that allow you to do an OIC.

Doubt as to Liability - There must be a doubt that the IRS debt is valid
Doubt as to Collectibility - There must be a doubt you could ever pay the amount of tax owed
Effective Tax Administration -The amount of tax is correct and is owed, but an exceptional circumstance exists that allows the IRS to consider the offer.

Things that Disqualify You for an OIC

You haven't filed all required Federal returns
You're involved in an open bankruptcy proceeding

Filing Requirements

If you're eligible to file for an OIC, then there are specific forms that must be filled out.

Form 656. This is a general form where you list all of your personal data, the type of tax and the years that you owe, and your offer
Form 433-A or Form 433-B. Form 433-A is for individual wage earners and 433-B is for businesses. You will use 433 -A is you are filing as both. This form is used to provide the IRS with you total financial condition.

What Amount Should You Offer

This is not an easy question. Theoretically, the IRS says that the offer must be the realizable value of your assets plus the amount the IRS could collect from your future income. For example your assets are worth $2,000 and the amount the IRS could collect from future income is $5,000, then your minimum offer should be $7,000. This sounds complicated but the IRS gives you some help in this area.

Realizable value of your assets -This is the amount the IRS could collect if it seized your assets and sold them now. The IRS uses the quick sale value, which is generally considered to be 80% of the fair market value. The IRS excludes $6,560 from your personal assets and $3,280 from your business assets when making the calculation.
Future Income -The future income is figured by subtracting your necessary living expenses from your total income.

The IRS provides a form 433-A worksheet in the OIC package. This form aids you in making the offer calculation.

Method of Making Payments.

The IRS offers 3 different ways of making the payments after the IRS agrees with your offer.

Cash offer - This offer is to be made in 90 days or less
Short - Term Deferred Payment - This offer can be paid in more than 90 days or up to 24 months.
Deferred Payment - This offer can be paid over the remaining statutory period for collecting the tax, which can be up to 84 months.

Five Deadly Mistakes in making an Offer

Make sure that you do not make the following mistakes:

Leaving out essential information on the offer form.
Forgetting about some of your tax liabilities
Offering less than the equity in all of your assets
Altering the form
Omitting signatures

What if your OIC is Rejected

The IRS must give you the reasons why your offer was not accepted. The main reason that the OIC could be rejected is that the offer is too low. If the offer is too low, the IRS will state an acceptable amount. You can amend your offer within one month. If this is rejected you can appeal the rejection.

There is a Downside to Submitting an OIC

Submitting the OTC is a very formal process. It requires painstaking detail and the obeying of all the rules. If you make a mistake along the way, your offer could be returned to you without consideration and you have to start over. Also, the offer examiner can ask you for much more backup if he/she feels that your OTC does not contain enough information. This can be a long drawn out process. You must dedicate yourself to this task if you want to succeed.

There is also a $150 application fee for filing. This can be waived if you are below the poverty guidelines.

You must also submit your tax returns and pay your taxes on time for 5 years. Otherwise the IRS can begin immediate tax collections.

There is another major drawback to submitting the OTC. If the IRS rejects your offer, they have all of the information on your financial situation, which allows them to accelerate the collection process against you. It makes no sense to submit an OTC unless there is a high probability that it will be accepted.

Things to do if you want to submit an OTC

The most important thin to do is get the IRS Form 656 from your local IRS office or from the internet. The URL for the IRS is www.irs.gov. This publication contains all of the forms, worksheets and detailed information on filling the OTC. Read this document through in detail before you begin.

The Kinder, Gentler IRS

The IRS has made great strides in the last few years to be more people friendly. They had very bad press for a lot of years before Congress stepped in and set up new guidelines. The IRS is much more helpful to the average person and is willing to help on problems. I have found in my dealings with the IRS that all they want is for you to communicate with them on your situation. They have a plan for almost any situation and are more than willing to come up with the best alternative for you. The OTC is a good example of a method to help people that have had a financial disaster.

DON'T BE AFRAID TO DO THE OTC IF YOU FEEL YOU HAVE A GOOD CASE. THE IRS MUST GIVE THESE OFFERS A FAIR CONSIDERATION.

GOOD LUCK

W.J. Fontenote
William Jarrell Fontenote succumbed to cancer on February 12, 2006. Rest in Peace, Beloved Friend.

Was this article helpful?