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:
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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