Are you struggling to pay a tax debt to the Internal Revenue Service (IRS) or the state of California? You might be able to get an Offer in Compromise to lower your tax liability. A qualified tax attorney can help you prepare your offer, increasing the likelihood the IRS will accept it.
What Is an Offer in Compromise?
An Offer in Compromise is when the IRS settles with you to lower your tax debt. Usually, the IRS will agree to reduce your tax liability based on reasonable collection potential (RCP). Your RCP determines your ability to pay your tax debt based on your assets and anticipated future income. The IRS usually doesn't accept an Offer in Compromise if your proposed amount is less than your RCP.
If you're struggling with a heavy tax burden that you're unable to pay, the Offer in Compromise wipes some of that debt away, giving you a more realistic chance of being able to pay it off.
When Should I Seek an Offer in Compromise with the IRS?
The IRS recommends that you only file an Offer in Compromise after you've exhausted all other payment options. In many situations, you can set up an installment plan with the IRS to pay your outstanding tax debt. If, however, the installment plan or the IRS' other repayment options still prove too burdensome for you, you should request an Offer in Compromise.
The statute of limitations on IRS tax collection is 10 years. If the agency hasn't collected your tax debt after this time, your tax liability is waived. If you have a tax debt and you're nowhere near the 10-year expiration, an Offer in Compromise could be a good option for you.
Who Qualifies for an Offer in Compromise?
Not everyone who owes back taxes is eligible to receive an Offer in Compromise. If you haven't filed all your tax returns to date or made estimated payments, the IRS won't consider your Offer in Compromise. It also won't accept one if you're in the middle of declaring bankruptcy, or if you're an employer who hasn't deposited federal taxes withheld from your employees' wages.
The agency also looks at your situation as a whole when deciding to accept your offer. Some factors the IRS considers when reviewing your Offer in Compromise are:
- Employment status (self-employed, employer)
- Members of your household
- Assets (vehicles, home loans, retirement accounts, stocks, bonds, etc.)
- Income (including Social Security and pension, unemployment, rental income, alimony, etc.)
- Day-to-day expenses (healthcare, housing, public transportation, insurance, etc.)
Knowing if your situation and tax debt will result in an acceptable compromise can help you prepare your offer before filing it.
Offer in Compromise: How the Process Works
To apply, you must send an application to the IRS with Forms 656, 433-A (OIC), 433-B (OIC), an application fee, and a first payment based on the offer you're making.
When you make an offer, you must also choose a payment option, either lump sum cash or periodic payment. If you choose periodic payment, you must keep sending tax payments (based on your offer) to the IRS while they consider your proposed Offer in Compromise. If you already had an installment agreement in place, however, you can stop making payments on it while the IRS processes your Offer in Compromise.
The IRS will inform you once they're received your request. Afterward, you must keep making periodic payments (if you chose this method) while you wait for the agency's response. Keep in mind that the IRS still has the authority to file a lien against your property during their Offer in Compromise decision process.
When Does the IRS Agree to an Offer in Compromise?
The IRS has three reasons for accepting your Offer in Compromise. They are for liability, collectibility, and effective tax administration.
Liability
If there's a genuine dispute between you and the IRS over the amount of tax debt owed, the IRS may accept your Offer in Compromise based on doubt as to liability.
Collectibility
If it seems unlikely the IRS will be able to collect the full amount owed, the agency will agree to a compromise. The doubt as to collectibility applies when your income and assets are less than the tax amount owed.
Effective Tax Administration
Effective tax administration applies when exceptional circumstances prevent you from paying the full tax liability or if paying the entire amount would put economic hardship on you.
Offer in Compromise in California
The California Department of Tax and Fee Administration (CDTFA) has an Offer in Compromise program for state tax liability as well. You must meet certain requirements to qualify.
Criteria to qualify for California Offer in Compromise program
- The tax or fee liability you have must be on a closed account
- You are no longer linked to the business that incurred the tax liability
- You don't dispute the amount of tax you owe
- You are unable to pay the full outstanding tax debt in a reasonable amount of time
For the CDTFA, you must apply by sending an application. They'll consider your application based on your ability to pay, your assets, present and future income, expenses, and potential for changed circumstances.
The CDTFA isn't the only California tax agency that accepts Offers in Compromise. The Franchise Tax Board (FTB) also allows taxpayers to file offers for reduced tax debts. To qualify, you must have exhausted all other payment options with the FTB, filed all required state tax returns, and not dispute the amount you owe.
The FTB uses similar criteria to evaluate each Offer in Compromise as the CDTFA. The FTB assesses the following:
- Your ability to pay
- Your assets
- Your current and future income
- Your current and future expenses
- The potential of your circumstances changing
- If your offer is in the best interest of the state
Professional Help Preparing Your Offer in Compromise
Why ask a tax professional to help you file an Offer in Compromise? If you state your assets or income incorrectly, make an inappropriate offer, or commit other errors filling out the forms, the IRS could reject your Offer in Compromise. To increase your chances of relieving your tax burden, contact a California Tax Attorney today to set up a consultation.