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IRS Disputes: Offer in Comprimise

So you’ve gotten your tax bill, and there’s no way you can pay the IRS what’s owed. What now? If your financial situation is really dire, consider what the IRS calls an “offer in compromise” (“OIC”) to pay only a portion of what you owe.

For the IRS to consider an offer in compromise from you, you must convince the IRS that it’s doubtful they’ll be able to collect what you owe them, either now or in the future. The IRS calls this “doubt as to collectability.”

The IRS won’t accept an offer in compromise unless the amount of money you’re offering is at least equal to value of all your assets plus all the money the IRS thinks they can take from any future income you may have. You must have already filed all returns due, and not be involved in bankruptcy proceedings. The IRS calls this the “reasonable collection potential” or “RCP.”

The IRS figures the value of your assets by estimating what they’d end up with if they seized all your property, paid off any debts (such as a mortgage) on the property and sold it all. To figure this out for yourself, you can calculate the “quick sale value” (“QSV”) of your assets by subtracting 20 percent from the fair market value.

How does the IRS figure out what your future income will be? Usually, the IRS arrives at a figure called “excess earnings” by subtracting your necessary living expenses from your present or estimated monthly income. The IRS will then:

  • Multiply this number by 48 if you’re offering to pay cash within 90 days
  • Multiply this number by 60, if you want to spread your payments out over two years
  • Use some other multiplier if you’re offering to spread your payments out over the time period left that the IRS is allowed to collect form you (known as the “statute of limitations”).

You may have a better chance at getting the IRS to accept an offer in compromise if you can prove that paying the debt would create an economic hardship or would be unfair and inequitable. This may be the case if:

  • You’re elderly and will find it difficult to find gainful employment
  • You have disabilities that make it difficult to work
  • You have a large number of medical bills due to your illness or the illness of a family member

The Offer In Compromise Process

You’ll first fill out an IRS Offer Form, Form 656 providing:

  • All taxes owed
  • Identifying information such as social security number and employer
  • Your marital status
  • An explanation of your circumstances
  • The reasons why you believe the full amount you owe isn’t collectable
  • Your source of funds for paying the amount you’re offering

The IRS will reject your offer if IRS personnel conclude that it doesn’t equal your reasonable collection potential. If the IRS rejects your offer, the rejection letter will likely include what amount the IRS would find acceptable.

You’re free to make another offer than more than you offered before but less than the IRS is suggesting is appropriate. It may also help to talk with IRS personnel to see how flexible they might be.

If the IRS accepts your Offer in Compromise, you’ll be expected to make all payments and file all future returns on time. If you don’t, the IRS can cancel their acceptance of the Offer In Compromise and you’ll have to pay the full amount that was originally due, plus penalties and interest.

If you can’t come to an agreement on an appropriate amount to be paid, you can always formally appeal the IRS’s rejection of your offer in compromise. The appeal must:

  • Be in writing
  • Be sent within 30 days of the date of the IRS’s rejection letter
  • Provide all the documentation provided to the IRS when making the Offer of Compromise

Although it’s work to fill out the forms, an Offer in Compromise is a good idea when your financial options are limited and you owe the IRS more than you’ll ever be able to pay.

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