An Offer in Compromise can be a great tool for your clients with an outstanding federal tax debt. This collection remedy allows your clients the chance at a fresh start with the Internal Revenue Service.
What is an Offer in Compromise?
An Offer in Compromise (“OIC”) is a settlement option offered by the Internal Revenue Service to taxpayers with an outstanding tax liability. An OIC allows taxpayers to settle their tax debt with the IRS for an amount less than what is currently owed.
The IRS will consider many factors before approving an OIC. OIC applicants are generally put through a rigorous financial investigation before the application is approved. While this results in a large number of OIC rejections, there is still a great chance of success with the right candidate and a strong OIC application.
As a tax professional, many of your clients will often want to opt for the OIC route simply because it is the only option that lowers the total value of the tax debt. It is also for this reason that this method is the most advertised settlement option by Tax Resolution companies, accounting firms, etc.
Is my client a good candidate?
There are many factors to consider before submitting an OIC for your client. First and foremost, the IRS will look to see that the taxpayer is current on all their returns. Any missing returns will render an OIC candidate ineligible for the program.
Next, the IRS will perform a thorough review of your client’s financial situation in comparison to the total debt owed. Before submitting your client’s application, you will want to review their finances in order to better understand if they are eligible for an offer.
Lastly, you will want to explain to your client that the IRS has a two-year time frame to approve or deny an OIC. It is important that your client understands that the process can take time.
What are some common reasons OICs are rejected?
- Collectibility. Generally, the most common reason an OIC is rejected is because the IRS views the taxpayer’s income (and potential future income) too high for the offer amount on the OIC. For example, if the taxpayer is an out-of-work dentist, then he has the potential of eventually earning income again despite his current financial hardships. The IRS will look to the past, current, and future earning capacity of the taxpayer to determine if they are eligible for the OIC.
The taxpayer will be required to submit a Form 433-A with their OIC application (Form 656). Form 433-A is a statement of financial condition which lists all of the taxpayer’s income, assets, and expenses. Furthermore, the taxpayer will likely have to provide documentation that outlines 6 months worth of canceled checks, mortgage documents, bank deposits, etc. The IRS will use this information, along with information they gather from their own investigation, to determine the eligibility of the taxpayer.
- Additional Tax Debt. Once the taxpayer has submitted their Offer in Compromise, they must ensure they are staying in compliance with the IRS as an effort of “good faith.” If the taxpayer continues to pile on the tax debt (by not paying estimated tax payments), then the IRS will use that as a sign that the taxpayer will not be compliant with the potential offer.
- Missing Information. One of the most overlooked reasons for rejected OIC is missing information. Taxpayers often will forget or omit pertinent information such as Social Security numbers, employer identification numbers, etc. Taxpayers will also inadvertently use older versions of the required forms. All of the most current forms can be found on the IRS website. These simple errors can cause the OIC to be returned to you immediately.
- A “Frivolous” OIC. IRS agents are wary of OICs that are submitted solely for the purpose of delaying collection action. Many taxpayers simply want to buy themselves more time to catch up on their tax debt, and they often look to OICs in order to delay collection activity. An example of a frivolous OIC would be one where it is clear on the face of the document that the taxpayer just wants to buy time on their tax debt (e.g. multiple, incomplete applications). This can also be evidenced by a history of tax avoidance techniques from the taxpayer. If the IRS believes that the application is solely submitted to delay collection activity, they will reject it immediately.
- Bankruptcy. A taxpayer is ineligible for OIC if there is an open bankruptcy proceeding under their name.
- Unfiled Returns. A taxpayer must be in compliance with all of their tax returns in order for an OIC to be considered. As of March 2017, OIC applications will now be returned without consideration in instances where the taxpayer has not filed all required tax returns. In such cases, the application fee will be returned and any initial payments submitted with the Offer will be applied to outstanding tax debt.
- Failure to Pay. Sometimes OICs can be retroactively rejected. For example, if a taxpayer’s OIC is approved and accepted, they must file and pay their taxes in a timely manner for 5 years after the acceptance of the OIC. If the taxpayer does not maintain their good standing, the OIC can be removed and all of the “forgiven” tax debt will be reinstated in the taxpayer’s name.
If the OIC is rejected, what are my options?
If the OIC is rejected, taxpayers can still submit an appeal within 30 days of the date on the rejection notice. The appeal will be submitted on Form 13711, “Request for Appeal of Offer in Compromise.” This appeal letter needs to address the issues raised in the OIC rejection, and the taxpayer will likely have to provide additional documentation. This appeal can potentially allow the taxpayer an opportunity to renegotiate their rejected offer under more acceptable terms for the IRS.
Offer in Compromise is a useful collection remedy that can allow an eligible taxpayer a fresh start with their tax debt. It is important to go over all the potential risks of an OIC rejection with your client to ensure that you submit a thorough application. Lastly, it is important to remember that if the OIC does not work out, there are other options and methods for relieving tax debt for burdened taxpayers— an OIC is simply one of many options available.
Want to learn more about getting offers accepted by the IRS? Check out this free ebook written by a former revenue officer.
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