Carrying long-term debt is a burden, but when the creditor is the government and the sum feels insurmountable, the weight can become psychologically and emotionally crippling. Bankruptcy, a common misconception, doesn’t offer relief for tax debts. However, a glimmer of hope shines through the IRS program known as an Offer in Compromise (OIC).
This program allows taxpayers facing financial hardship to settle their tax debt for less than the full amount owed. While not a guaranteed escape route, with roughly one-third of applications approved, it’s worth exploring its potential.
The Three Steps to an OIC
- Form Frenzy: Prepare yourself for paperwork. You’ll need to complete IRS Form 433-A and 656. If contesting the debt itself, add Form 656-L to the mix.
- Financial Foot Forward: Invest in a $205 nonrefundable application fee. This requirement may be waived if your income falls below the IRS low-income threshold.
- Making an Offer You Can’t Refuse: Propose an alternative payment amount to the IRS. Remember, diligence is key. The more thoroughly you demonstrate your inability to pay both bills and taxes, the higher your approval chances. A crucial 20% of your proposed payment must accompany your application for it to be considered. If rejected, this sum gets applied towards your debt.
Earning Eligibility
Qualifying for an OIC is no walk in the park. The IRS sets strict eligibility criteria:
- Form Completion: All questions on the forms must be answered accurately and thoroughly.
- Tax Return Tidiness: You must be current with your tax filings.
- Financial Fair Play: The $205 application fee needs to be paid or waived.
- Debt Diversity: At least one tax debt included in your OIC must not have a received bill.
- Tax Payment Tracking: You must have submitted all current year estimated tax payments.
- Bankruptcy Blues: You cannot be in the midst of a bankruptcy proceeding.
- Tax Time Tenacity: You must continue filing tax returns and paying taxes while your OIC application is pending.
- Justice System Sidestep: Your case cannot have been transferred to the Justice Department by the IRS.
Failure to meet these criteria will result in your application being returned for correction and resubmission.
The IRS Weighs the Scales
The IRS analyzes your OIC through an objective lens, focusing on your financial information and the likelihood of recovering a specific sum, known as the “Reasonable Collection Potential.” This intricate analysis considers your assets, income, earning potential, cost of living, and debts. Essentially, the IRS compares your proposed OIC payment to their calculated Reasonable Collection Potential.
Reasons for Acceptance:
The IRS may accept your OIC for three primary reasons:
- Financial Hardship: They acknowledge your genuine inability to pay the full debt.
- Debatable Debt: The validity of the debt amount itself is in question.
- Uncollectible Debt: They believe collecting the full amount is unlikely.
The Outcome:
If your OIC is accepted, you get one of two options
- Lump Sum Liberation: Settle your debt in full within five months.
- Installment Ingenuity: Pay off your debt over a 24-month period.
Remember, the initial 20% payment counts as your first installment under either option.
While Waiting for the IRS Verdict
Once you submit your OIC application and supporting documents, all IRS collection activities will be temporarily halted. Any existing tax liens will remain in place until a decision is reached and all payments are made if your offer is accepted. You will continue to receive any tax refunds you’re owed unless they’re related to an amended return filed after your OIC is activated.
If your tax refund has been garnished and you’re waiting for an IRS response, you can request an offset bypass refund based on demonstrably proven economic hardship.
Rejection and Beyond
Don’t let a rejection discourage you. OIC denials are appealable, and other options like installment plans or “currently not collectible” status can offer relief from overwhelming financial stress.
Facing Tax Debt Head-On
If the weight of tax debt feels unbearable, an Offer in Compromise might be your lifeline. To navigate this complex process and identify the best solution for your specific circumstances, don’t hesitate to reach out to us. Remember, you don’t have to face this challenge alone.
By understanding the intricacies of OICs, you can take a proactive approach towards alleviating your financial burden and finding a path towards financial freedom.
