Offer In Compromise Form – IRS Help

Did you know the IRS has a method to settle your overdue taxes for pennies on the dollar?  If you qualify for an “offer in compromise”, often referred to as an “offer” or an “OIC,” you could potentially have the IRS settle you debt for as low as 1% of the amount you owe.
An offer in compromise is simply an offer to the IRS asking them to reduce or eliminate your tax debt for the amount of money you offer. Now that may sound a little too good to be true, but it isn’t if the IRS feels you are making a fair offer based on your current financial situation.

No taxpayer has any predetermined right to receive an offer in compromise. The process is entirely a matter of government discretion. But generally the IRS must give a properly submitted Offer in Compromise the proper consideration. Less than half of the offers submitted to the IRS are accepted. If they decline your OIC, you do have the right to take the case to the IRS Appeals Office.

So how do you submit an OIC?

In order to submit an offer you must complete IRS Form 656, Offer in Compromise. There is a $150 application fee that must be submitted with the Form 656. You may be exempt from the fee if your monthly income is below the poverty guidelines. If you claim the poverty guideline exemption, you must submit an Application Fee Worksheet from the Form 656 booklet.
Along with the Form 656 you must also include a Form 433-A. This is the form where you disclose all of your financial information to the IRS. This form must be completed thoroughly and accurately. The IRS will scrutinize this form. Your chances of getting approved for you OIC almost rest exclusively on information in the Form 433-A

If you feel you do not have the financial knowledge to fill out a FORM 433-A, it is recommended by tax professionals that you hire a competent tax adviser to fill it out for you. Submitting the financial information with inaccurate numbers will severely damage you chances of the IRS accepting your OIC.

If your Offer in Compromise is rejected you can do two things to appeal the decision.

1.    You can formally appeal the rejected offer in compromise
2.    You can call or write the person who signed the rejection letter and try to get that person to change their mind. It is not that uncommon for the IRS to reconsider your offer and engage in further negotiation to resolve the situation.

To file a formal appeal, send a letter within 30 days of the date of the rejection letter, such as:

“I wish to appeal from the rejection of an offer in compromise submitted February 2, 2010 and rejected on August 15, 2010. I request a conference.”

Your appeal to an unaccepted offer in compromise will need to have the following three things be true in order for them to accept your appeal:

•    You have filed all past tax returns.
•    You are current on your tax payments for the present year. Self-employed people need to have made all quarterly estimated tax payments; employers must have made all payroll tax filings and deposits.
•    You furnished all of the data requested by the IRS during your offer processing.

The appeal is solely up to the discretion of the IRS, you do not have a legal right to demand an appeal. In other words, you cannot take the IRS to court for rejecting your appeal or your original offer.

Everyone wants to file an Offer in Compromise when they first hear about it, but unfortunately not everyone qualifies. Otherwise everyone would have their tax bill reduced or eliminated.

To qualify for proper consideration of your offer by the IRS, you must show them that you meet one of the following three conditions:

•    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.”
•    There is some doubt as to whether you owe the tax bill. The IRS calls this “doubt as to liability.” This condition is unusual.
•    Due to exceptional circumstances, payment of your full tax bill would cause an “economic hardship” or would be “unfair” or “inequitable.”

The vast majority of people who file an Offer in Compromise qualify under the first condition “doubt as to collectibility.” This basically means that if the IRS looks at your financial condition, they will determine that they are not going to be able to collect the money from you. Here is a case where it pays to have low or no income. It also helps if you are older as you have fewer years of future earnings potential.

The problem is you need to prove to the IRS that you can’t afford to pay them and that is not a simple process.

Per the IRS regulations, the amount of an Offer in Compromise must be equal to the “realizable value” of your assets plus the amount of money the IRS could take from your future income. For example, if your assets are worth $5,000 and the amount of your future income that’s will be available to the IRS under their collection rules is estimated at $ 9000, your minimum offer must be $14,000.

This is just an example and the formula they use is not that simple. T calculate what a fair offer is, you can consult a tax professional or use one of the Offer in Compromise Software Calculators available. This is money well spend as if can either stop you from offering too much or let you know what the ballpark figure the IRS is likely to accept.

You can also use the method explained by the IRS in their publication on Offers in Compromise. It is a difficult formula and process, but if you are knowledgeable enough, this is one method of determining how much you should offer.

What payment options do I have?

There are three basic options:

•    Lump sum Cash Offer
•    Short Term Periodic Payment Offer
•    Deferred Periodic Payments Offer

1. Lump Sum Cash Offer – Payable in non-refundable installments, the offer amount must be paid in five or fewer installments. A non-refundable payment of 20 percent of the offer amount along with the $150 application fee is due upon filing the Form 656 – Offer in Compromise.

2. Short Term Periodic Payment Offer – Payable in non-refundable installments; the offer amount must be paid within two years of the date the IRS received the Offer in Compromise. . The first payment and the $150 application fee are due upon filing the Form 656.

3. Deferred Periodic Payment Offer – Payable in non-refundable installments; the offer amount must be paid over the remaining statutory period for collecting the tax. The first payment and the $150 application fee are due upon filing the Form 656. The IRS is not bound by either the offer amount or the terms proposed by the taxpayer

Ok, you did ever thing correct, as least as far as you know, and your Offer in Compromise (OIC) was still rejected. Now what happens?

Legally the IRS has to give you a written explanation if your offer is rejected. There are two reasons the IRS normally will not accept your offer:

•    The most common reason is simply that your offer is too low.
•    Less common is that you are what they call a “notorious” character — for example, you are a convicted felon.

If they IRS is correct ion the second reason that is little you can do.

If they rejected you for the first reason – your offer is too low – you can request a copy of the report that lists the factors that caused the IRS to not accept your offer. So if your offer was rejected, ask the IRS for a copy of the report. If the IRS doesn’t send you one or declines your request, file the request under the Freedom of Information Act. Generally you will get a copy of the report with out needing to do this.

Once you have the report read it and discuss it with your tax professional. Once you know the reasons, resubmit your offer. Just make it reasonable based on the factors listed in the report. The IRS revenue officer or special procedures officer handling your Offer in Compromise may show you a way to make your offer acceptable.

You should resubmit your offer within a month of receiving the rejection notice. If you do so, you do not need to submit a new Form 433-A (your financial information) again. This will save you a lot of time, as you will not need to submit new backup information for the new numbers on the new financial statement. However if your financial information has changed dramatically or your offer is very different form your first offer, you may have to submit a new form 433-A.

You can resubmit your offer via a letter via certified mail. In the letter you should acknowledge that you wish to change your offer by increasing the dollar value of the offer. If you are trying to submit a significantly different offer, you should file a new Form 656.

Completing the two necessary forms – the Form 656 (the actual Offer in Compromise) and the related Form 433-A (your personal financial information) is just the start of the offer process After you submit these two forms, the IRS will look over the “offer” and your financial information very thoroughly. This is why it is extremely important that this information be complete and accurate.

As we stressed elsewhere on this site, if you do not have the ability to accurately fill out these forms, hire a tax professional. The money spent on their guidance could be the best money you have ever spent. Besides reducing your tax debt, you stop the collection calls and get the IRS out of your life.

After the IRS receives your forms, they will basically do an audit on the financial information you submit. You can be sure the IRS will ask you for backup information for each number listed on the financial information form 433-A. This will include pay stubs, your lease if you rent, your monthly mortgage statement if you own your home, recent credit card bills, utility bills, phone bills, etc. Do not even think about putting something down inaccurately on the forms or leaving out a source of income that they request on the form. Your Offer will certainly end up be declined.

The process after the offer has been submitted can be very trying as the IRS will want to be sure there is no inaccurate financial information. Knowing the amount of documentation that the IRS may request, you may want to keep records of everything you spend money on and the related receipts for several months before you submit the offer. At least you will be well prepared for all the potential box loads of information they may request.

Finally the requests for information will stop and you will hear from the IRS as to whether your offer has been accepted or not.