IRS OFFER IN COMPROMISE (OIC)

Definition: The process by which a taxpayer, who is in debt to the IRS and/or the State, can obtain relief from paying a significant portion of the debt.

How does a taxpayer get hopelessly in debt to IRS?

  • Business start-up in which insufficient monies are withheld to pay the taxes (self-employment, payroll, etc.)
  • Failure to file tax returns for several years on which taxes are owed - penalties and interest continue to accumulate
  • Failure to file/pay one year - interest and penalty accumulate to very high levels
  • Because of medical or problems which cause financial difficulties, taxpayer cannot pay taxes, either personal or business or both

Grounds for Offer in Compromise fall into three categories:

Doubt as to liability: There is a genuine dispute about the existence or amount of the tax.

Doubt as to collectibility: The taxpayer cannot pay the full amount due and meet basic living expenses.

In this case, an offer must be the maximum amount the taxpayer can pay after allowance for basic living expenses, calculated by:

  • Realizable value of taxpayer’s assets (80% of FMV)
  • Plus future income
  • Less allowance for basic living expenses

Effective Tax Administration: collection would create a significant economic hardship or exceptional circumstances make collection unfair or inequitable

Examples:

  • Economic hardship: Incapable of earning living because of medical condition, which will deplete his/her financial resources
  • Exceptional circumstances—taxpayer hospitalized almost continuously for years fails to file returns - when health returns, finds IRS prepared a substitute return years back and penalties/interest are more than 3 times original amount

A Few Important Points:

  • An OIC will not be accepted if the taxpayer has a history of noncompliance
  • The Taxpayer must have all tax returns filed before beginning the process
  • If it is a business, the business must have filed and paid all employment tax returns on time for the two quarters preceding filing and be current in quarter in which offer is submitted
  • The Taxpayer must not be involved in an open bankruptcy proceeding
  • If the OIC is accepted, the taxpayer must stay current for 5 years after the settlement
  • Payments may be in cash or there are deferred payment options

This is a slow process. It can take anywhere from 5 months to over a year to get processed, but collection action stops until the offer is processed. However, if IRS determines that the OIC was filed solely to hinder or delay collection action it will be returned without further consideration.

Audit Strategies:

  • Meeting and dealing with the auditor
  • Engage an experienced professional to represent you
  • Establishing trust and integrity with the auditor is an important step in the process
  • Answer the auditor’s questions fully and honestly
  • Take control of the audit
  • Limit the scope of audit
  • Establish time frames for responding to requested information and reach an agreement regarding the time necessary to complete the examination
  • Ensure there is a clear understanding on the site of the actions, information, and decisions needed by the examiner, client and practitioner to complete the examination

Last Minute Tips:

  • Deal with the debt promptly, before penalties and interest accumulate
  • File your tax returns - failing to file is not a good decision
  • Seek help from a reputable firm regarding the various alternatives
  • New businesses need to factor in the effects of all types of taxes - quite often they are disregarded by a new business, but they may be significant

Should you need professional assistance, call us at 1-800-984-1040 or send us an email at: info@peoplestax.com