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Can IRS Debts be Settled?
Yes, the IRS can settle with you on a tax debt through what is called an “offer in compromise.” However, many clients are not good candidates for an offer in compromise because their “reasonable collection potential” (based on their income and assets) exceeds the amount of the tax debt. More often than not, we see offers in compromise submitted that should never have been submitted.
Offer in Compromise
There are several requirements for an offer in compromise (OIC).
Pre-Qualifiers for Filing an OIC
- You must not be in an open bankruptcy proceeding
- You must have filed all required federal tax returns
- You must make all estimated tax payments
- If you are self-employed, you must have submitted all required federal tax deposits
Requirements for Filing an OIC
- There is some doubt as to whether the IRS can collect the tax bill from you – now or in the foreseeable future. The IRS calls this “doubt as to collectibility.”
- due to exceptional circumstances, payment of your full tax bill would cause an “economic hardship” or would be “unfair” or “inequitable.”
- There is some doubt as to whether you actually owe all or some of the debt. The IRS calls this “doubt as to liability.”
After you and your attorney have identified which condition(s) exists, you can start your application by completing IRS Form 656. There is a $186 application fee. In addition to the form, you will need to provide the following:
- Financial information by filling out Form 433-A/F (individuals) or 433-B (businesses). It is extremely important to be truthful and accurate on this form.
- Various documents to verify your income and financial assets – bank records, vehicle registration, pay stubs, etc.
How much should you offer?
You will calculate your minimum offer amount by following the instructions on Form 433. Without going into details, the formula will take into consideration the net realizable value of your assets (i.e., how much your assets would be worth if they were sold) and your excess monthly income after subtracting your monthly expenses from your monthly income.
Special circumstances
Special consideration is given to those with physical and psychological impairments, bleak financial prospects due to advanced age (over 60), drug or alcohol related problems, or a family members problem if it affects your finances. To bring these issues to the attention of the revenue officer, you will attach a letter with supporting documents (e.g., medical records).
What if your offer is rejected?
The most common reason that an OIC is rejected is that the offer is too low and wasn’t correctly calculated.
If the offer is too low, the IRS will state the acceptable amount. You can also request a copy of the Revenue Officer’s report through a Freedom of Information Act (FOIA) request.
If you wish to increase your offer, you can do so within a month by simply writing a letter without having to resubmit your application.
The second option is to appeal your rejected offer. You can further negotiate with the assigned Revenue Officer and if that fails, you can submit IRS Form 13711 to start a formal appeal.