If you owe taxes and want to settle with the IRS because your financial situation will not allow you to ever pay off the taxes owed, you may qualify for the IRS’ Offer in Compromise program. This program is what people are talking about when they say, “settle with the IRS pennies on the dollar”.
The IRS’ Offer in Compromise process is actually quite mechanical. There is very little room for negotiations outside of its mathematical methods. An Offer in Compromise decision is based nearly entirely on your personal financial situation, which will drive the offer amount. Too often, people submit offers to the IRS and are immediately denied because there’s no financial support for why the amount was offered.
Before making an offer, it is highly recommended that you complete the Offer in Compromise Pre-Qualifier Tool, which can be found here. If you feel you’re a candidate to make an offer, this tool is meant to let you know if you’re on the right track. If you’re not up to going through this pre-qualifier or feel uneasy about it, you should feel free to fill out our Financial Intake questionnaire and contact one of our tax relief professionals to go through whether you would qualify.
How to Fill Out Offer in Compromise Forms
Two forms must be completed to make an offer: Form 656 and Form 433-A(OIC). If spouses are filing, they must each file a separate form, although it may contain much of the same information. The 656 is where you make your offer. Form 433-A(OIC) is where you outline all of your financial information.
Filling Out Form 433-A(OIC)
- List all of your assets and secured debts. If you own a business, you will need to list those assets as well. The values are reported and the assets are reduced by 20% to determine a "liquidation" value. You will need to provide three months of bank and investment statements and all other supporting documents for the values you’ve used on the form. Forgetting to include those documents may cause a rejection of your offer.
- List all sources of income. Include everything whether from wages, social security, pensions, business income, etc. You will need to report this as a monthly amount. You will provide verification of your income such as pay stubs and other receipts.
- List your expenses. This is a section where we find the most problems and add value to for our clients. The IRS starts with National Standards for monthly living, housing, and transportation costs. You are automatically allowed these expenses without the IRS digging into what you actually spend. Too often, people undercut themselves by not taking into account these standards. If you spend above those standards, you must provide detailed explanations and documentation to get the IRS to allow more expenses. Other items to include might be: child support payments, for which you will have to provide your Court Order; and payments on secured debt like a bankruptcy payment, for which the IRS will want to see the bankruptcy agreement.
Also on Form 433-A(OIC), you calculate your offer as follows:
Start with your income less your allowed expenses. This is the amount the IRS says you have left over every month to apply to your tax bill. Take this number and multiply it by:
- 12 – if you would be able to pay your offer in five months or less; or
- 24 – if you need more time to pay your offer (up to 24 months), you multiply your income less your expense by 24.
- Then, add to that number your assets minus liabilities.
This is the amount of the offer. If it is less than what you owe, that’s what you will request to the have the IRS settle for. It cannot be zero, but could be just $1.00 if you don’t have any left-over income or assets.
Filling Out Form 656
Form 656 must also be completed to tell the IRS what years you are trying to compromise/settle for and to let them know how you will make your offer payment(s). If you have exceptional circumstances, you will need to explain that on this form also. There is a $186 filing fee; however, if you qualify for a low-income certification, this fee will be waived.
You may choose to pay your offer off in one lump sum or in up to 24 monthly payments. If you want to pay in less than five months, you must make a down payment of 20% of your offer. If you want to pay in six to 24 months, you will have to make your first monthly payment along with your filing fee. Those payments must continue to be made while the IRS is considering your offer. This is very important, because if you miss a month, your offer will be rejected and you won’t have any appeal rights.
Form 656 also has a long list of items to read to show your understanding of making the offer. If you have any questions on these things, you should talk to a tax professional about them.
What Happens After You File for an Offer in Compromise
The completed Offer in Compromise is then sent out to the IRS in Holtsville, NY, where it is processed. Be patient! Even a very straight-forward offer application takes typically six months to process.
In approximately two weeks following the offer filing, you may receive a letter stating that a tax lien has been filed if one has not been filed already. There is nothing to do about this. The IRS is just protecting its interest as they consider your offer.
In about a month after filing the offer, you should receive a letter from the IRS stating they have received your offer and that someone will contact you within the following four months to discuss the offer.
Throughout this time that the IRS is considering your offer, if anything major changes with your situation, you should notify the IRS. You must also keep up on your current tax liabilities, meaning filing all tax returns when due and paying all estimated taxes. The IRS will automatically reject your offer if current taxes are not paid when due. However, you do not need to continue any installment agreement you have entered into prior to making the offer.
The Good News!
If your offer is accepted, the IRS may call you and will also send you a letter in the mail outlining the terms of the offer with instructions for making future payments. Things to keep in mind after having an accepted Offer in Compromise:
- Payments may be made to the address on the letter you receive or online. You should always make sure to include your social security number and designate the payment as an “OIC” payment so the payment is applied correctly.
- Any tax refunds you have for the following tax year will be kept by the IRS. It may be a good idea to revisit your payroll tax deductions to be sure you are not overpaid for that year. Any amounts collected through a refund is over and above the offer and will not be applied to the offer.
- It is very important that you remain compliant with all of your future tax filings and tax payments. If you miss a filing or miss a payment within the next five years, the offer will be revoked and all of your tax liability, penalties, and interest will return.
The So-so News
You may receive a call or letter from the IRS asking for additional and updated information from you. Because so much time will have passed since you filed the initial offer, the IRS wants to be sure your situation hasn’t changed. If your application was missing some information or the IRS needs clarification on things, the personal assigned to your case will let you know and give you time to get more information to him/her. A call or letter like this isn’t necessarily bad news. It just means that you have to provide more to make your case.
The (Possibly) Bad News
There are times where the IRS sends a letter stating they have rejected your offer and that they will dismiss it within 10 days of their letter. Please know that this does not necessarily mean you are outright "rejected." It does mean that the IRS needs more information or has questions and is only prompting you to contact them to find out more. You have to pay attention to those deadlines or the offer will be formally rejected and returned to you. Any money you paid as a deposit will be kept by the IRS if you didn’t specifically request otherwise in your offer application.
It could also mean that you haven’t been able to prove your case and that the IRS is not interested in entertaining an offer from you. If you believe the IRS has rejected your offer in error, you may appeal the decision within 30 days. Your file will be re-routed to an IRS Appeals officer and reviewed in hopes to find a resolution. If you don’t appeal, you will need to either full pay your taxes or request an installment agreement with the IRS to pay off your debt over time.
As you can see, the Offer in Compromise process is meant to be straight forward, but often times is anything but that. It is important to pay attention to the rules, follow deadlines, and stay in touch with the IRS throughout the process.