If you can’t pay your taxes in full, the IRS may agree to settle your tax debt for less than the full amount owed. Recently, the IRS has approved nearly 40% of just such OIC offers submitted. The catch? You need to make rigorous financial disclosure on application, submit a non-refundable 20% down of your offer with your request, and stay current on all your tax filing and payment obligations for the next 5 years if your offer is accepted.
Offers in Compromise (OICs) are what those TV and radio advertisements I mentioned a few chapters ago were trying to sell you on. More specifically, an OIC is an agreement between you (the taxpayer) and the IRS that settles a tax debt for less than the full amount owed.
They aren’t as common as those advertisements make them out to be though. To submit an OIC, you must complete detailed financial forms listing all your assets and income. The IRS will use this information to calculate your reasonable collection potential and decide how much to accept. Generally, you must make an appropriate offer based on what the IRS considers your true ability to pay. In 2010, the IRS accepted about 25% of offers submitted. This has increased to about 40% recently as the IRS tries to collect more money. Now may be the time to act. But first, let’s talk about the downsides to OICs.
What Are Some Downsides To OICs?
Because of the number of frivolous offers previously submitted, the IRS now requires you to put a non-refundable 20% down of your offer upon filing your request. If the IRS decides they do not like your offer, they will reject your request and keep the money, which will be applied to any taxes you owe.
Importantly, if your offer is accepted, you must continue to stay current with all tax filing and payment obligations through the fifth year after your offer is accepted. This is very important. You must keep up on your taxes after your OIC is accepted – or else it may be revoked and you’ll end up owing the entire amount of your taxes.
Finally, don’t think you’ll receive instant approval or rejection of your offer. The IRS can take 12 to 24 months before it gets back to you with its decision.
Am I Eligible For An OIC?
In order to be eligible, you must:
- File all tax returns you are legally required to file;
- Have received a bill for at least one tax debt included in your offer;
- Make all required estimated tax payments for the current year; and
- Make all required federal tax deposits for the current quarter if you are a business owner with employees.
Am I Eligible If I Am Able To Pay The Full Amount Of My Taxes?
Generally, the IRS will not accept an offer if you can pay your tax debt in full or through an installment agreement and/or equity in assets.
If I Enter Into An OIC, Do I Get To Keep Any Refunds?
Generally, no. The IRS will apply those refunds to your taxes owed and will not consider it as part of your OIC.
What About Penalties And Interest?
Penalties and interest will continue to accrue during the consideration of your offer. After you file your offer, you must continue to timely file and pay all required tax returns, estimated tax payments, and federal tax payments.
What Types Of Offers Are There?
There are two types of offers. The first is a lump sum cash offer, which requires 20% of the total offer amount to be paid with the offer and the remaining balance paid in 5 or fewer payments within 5 or fewer months of the date your offer is accepted.
The second is a payment plan offer. This option requires the first payment (of 20%) to be paid with the offer, and the remaining balance paid within 6 to 24 months, in accordance with your proposed offer terms.
How Does The IRS Calculate The Amount I Need To Pay?
The IRS is looking to get the maximum amount out of you, but it can’t get more than what you have. To figure out what you can pay, they require you to fill out a Collection Information Statement. On this form, you must list all your assets, debts, income, and expenses. The IRS will look at assets including bank accounts, investment accounts, retirement accounts, life insurance, real estate, cars, and valuable property (artwork, jewelry, or collectibles). They do not care about your clothing, furniture, or other personal household goods. By adding all these up and subtracting any debts on them, the IRS calculates your Available Individual Equity.
Then the IRS looks at your income and expenses to calculate your Remaining Monthly Income. If you are making a lump sum offer, you multiply the Remaining Monthly Income by 12 and add it to the Available Individual Equity to calculate your Minimum Offer Amount. If you are making a payment plan offer, you multiply the Remaining Monthly Income by 24 and add that to the Available Individual Equity.
As an example, if you have $50,000 in assets (your Available Individual Equity) and $500 in Remaining Monthly Income, your offer would be:
- Lump Sum: $50,000 plus $6,000 = $56,000.
- Payment Plan: $50,000 plus $12,000 = $62,000.
Maryland’s OIC Program
Maryland has its own Offer in Compromise program which can be used for all taxes administered by the Comptroller, including the Admissions and Amusement Tax, Income Tax, Sales and Use Tax, and Withholding Tax. Under the program, Maryland will look at your available assets, consider your circumstances, and arrive at a fair resolution of your liability by considering a reduction of the amount due.
Am I Eligible for a Maryland OIC?
In order to apply for this program, you must meet the following requirements:
- You have incurred a delinquent tax liability that has resulted in an assessment.
- You have exhausted all other avenues of administrative appeal.
- There is no issue remaining that can be appealed.
- Two years must have passed since you became liable for the tax.
- You must be current with respect to all returns filed or required to be filed to the Comptroller’s Office.
- You must not be currently involved in an open bankruptcy proceeding.
- You are unlikely to be able to make payment in full any time in the foreseeable future due to your financial situation.
- You either are without resources or unable to apply present and/or future resources to paying the outstanding tax liability.
What Are The Downsides To A Maryland OIC?
You must remain current with respect to future filings for at least three years after the Offer in Compromise is accepted. If you do not, you’ll owe all the taxes immediately, and the Comptroller can take all necessary action to collect.
Can I Appeal Maryland’s OIC decision?
All decisions under the Offer in Compromise Program are final and cannot be appealed. This is why you should carefully consider the facts and arguments you submit with your offer. The Comptroller’s Office will consider another OIC if your circumstances change.
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