IRS Forgiveness Program & Offer in Compromise (OIC)
The IRS Forgiveness Program is a deal struck between a taxpayer and the IRS in which the taxpayer agrees to pay less than the total taxes owed. If taxpayers can pay their tax due in full through an installment plan or another method, they are frequently ineligible for an OIC. Topic 202 contains information about making tax payments, including installments. If you own an employee-owned business, you must have completed all required federal tax contributions for the current and previous quarters before applying for an OIC. In addition, you must have filed all applicable tax returns and received a bill for at least one of the tax obligations listed in the offer.
The Internal Revenue Service frequently rejects a taxpayer’s Offer in Compromise (OIC) unless the amount supplied is at least equal to, preferably more significant than, the amount that may be collected (RCP). The IRS uses the RCP to calculate an individual’s tax obligation. The RCP includes everything of marketable value possessed by the taxpayer, from houses and automobiles to savings accounts and jewelry. The RCP considers future revenue after subtracting obligatory costs in addition to assets.
Why is there such a low rate for OICs?
To begin with, the great majority of candidates are likely just unqualified. They may be able to satisfy their tax obligations on time if they have equity in assets or anticipate receiving money in the future. Under typical circumstances, if a person owes $20,000 in taxes but has a $50,000 retirement account, the IRS will not negotiate a settlement with the client.
Then there’s the risk that relocating may be prohibitively expensive. Of course, not every taxpayer can compute their OIC offer.
In 2019, the IRS published final regulations raising the OIC user fee from $186 to $205. An OIC may drastically increase expenditures, so a 10% increase may appear minor. Many people prefer not to apply for an OIC because of the needed user fee. You should figure out how much money you’ll need to pay the tax payment because that is the actual cost. The “offer amount” is the minimum payment required to repay an IRS tax bill.
Last but not least, abide by the rules. Individuals will not be eligible for an OIC in most situations until they have finished their tax filings for the year and paid any estimated tax payments that were due (if applicable). To be eligible for this benefit, a business owner must have paid their total share of federal taxes for the current quarter. Furthermore, taxpayers participating in a bankruptcy procedure are ineligible for an OIC.
Fees for applying to the offer in the compromise program
In your OIC application to the IRS, you must include the $205 user fee and a portion of the offer amount. Unless you qualify as a low-income taxpayer, you must establish that you can afford to pay at least some of the OIC before the IRS would accept it. The IRS will not reimburse your OIC application fee, regardless of whether or not you are accepted into the program.
If the taxpayers opt for periodic payments, they must send money to the IRS once a month while their offer is being examined. Most OICs need seven to twelve monthly payments to be paid to the IRS. They can be significant, and there is no guarantee that the IRS will even recognize the OIC. By 2020, the IRS’s approval rate for OIC applications had fallen below 30%.
OIC incurs additional costs as well. If you decide to appeal, you will incur further charges when two parties disagree on an OIC application, 15% appeal to the IRS.
To qualify for an OIC based on “doubt as to collectability,” which is IRS jargon for “You owe, but you don’t have the money to pay,” you must show the IRS that it will be unable to collect all of the taxes you owe before the statute of limitations ends. The “collection statute expiry date” is when the IRS’s power to collect unpaid taxes expires. This is usually done ten years after the taxes were assessed.
This means that your monthly disposable income (your average monthly income minus your allowable monthly living expenses) is more than your tax liability plus the net equity in your assets (home, 401(k), savings, investments, and so on).
What variables influence the IRS’s calculation of the minimum permissible collection amount?
The IRS calculates your OIC in two stages: first, they look at your monthly income and then examine your assets’ value. After seeing this, the IRS will better understand your “reasonable collection likelihood.” The following is an example of the OIC computation, which calculates your monthly payment:
How much will I pay after I get into an OIC program?
The fewer assets you provide, the better. Of course, it’s not relatively that straightforward. Fill out Form 433-A (for wage earners and self-employed) or Form 433-B (for those who are neither wage earners nor self-employed) to determine how low an offer the IRS will accept (for businesses).
Make an effort to contact a lawyer.
Although self-filing is feasible, it is not recommended by professionals.
There are many tax preparation services on the market. Ideal Tax, for example, has a staff of tax specialists and provides free first consultations to all new clients to understand their possibilities for decreasing their tax burden with the IRS.
