An Offer in Compromise (OIC) can be a lifeline when confronted with an overwhelming tax debt. It enables you to resolve your tax liability for a lesser amount than the full amount owed. However, the process of determining the appropriate quantity to offer is complex and necessitates much financial analysis and strategy. There are many factors to take into account to achieve a favorable outcome.
What Is an Offer in Compromise?
The Offer in Compromise option is intended to provide taxpayers with a new beginning when the complete payment of their tax debt would result in financial hardship. If you can demonstrate that you are unable to pay your tax liability in full or that doing so would be unjust or inequitable due to exceptional circumstances, the IRS may consider your offer.
Factors to Take into Account When Establishing Your Offer Amount
There are a few factors to take into consideration when determining your offer amount. Some of these include:
- Reasonable Collection Potential (RCP): The RCP is the foundation of your offer. The RCP is the IRS’s assessment of your financial capacity. It encompasses your prospective income and net realizable equity in assets after accounting for necessary living expenses. In essence, the IRS determines the amount of revenue it could potentially collect from you over a specific period by considering your income, expenses, and assets.
- Monthly Income Available for Disposal: Begin by determining your total monthly income from all sources to determine your RCP. Subtract your essential living expenses, including rent, utilities, supplies, transportation, and medical expenses. Your monthly disposable income is the remainder. To establish a baseline for your offer amount, multiply this figure by 12 to represent one year of disposable income.
- Assessment of Assets: The IRS evaluates your assets in addition to your monthly disposable income. This encompasses cash, investments, real estate, vehicles, and other valuable property. The value of any assets that can be liquidated to satisfy your tax debt must be incorporated. Nevertheless, the valuation of assets can be intricate and frequently necessitates negotiations with the Internal Revenue Service.
Determining the Minimum Offer Amount
In order to confirm that your offer is taken into account, it must exceed your RCP. A simplified approach to determining a minimum offer is as follows:
Step 1: Calculate Monthly Disposable Income. Combine your total monthly income from all sources and subtract your necessary living expenses. You are provided with your monthly disposable income.
Step 2: Determine Annual Disposable Income. To obtain one year’s worth of disposable income, multiply your monthly disposable income by 12.
Step 3: Include Net Realizable Equity in Assets. Evaluate the value of your assets that can be sold or liquidated and add it to your annual disposable income. For instance, if your monthly disposable income is $500, your annual disposable income would be $6,000 ($500 multiplied by 12). If your assets are valued at $4,000, the minimum offer sum should be $10,000 ($6,000 + $4,000).
Presenting the Offer
Once you have a figure, you may submit your offer using IRS Form 656, Offer in Compromise. In addition to the application form, you are required to submit an initial payment towards your offer amount and an application fee. The application fee and initial payment may be waived if you meet the criteria for low-income certification.
Payment Options for Your Offer
The IRS provides two principal payment options for an OIC:
- Lump Sum Cash Offer: In conjunction with your application, you are required to submit an initial payment of a portion of the offer amount. You are required to pay the remaining balance in installments if the IRS accepts your offer.
- Periodic Payment Offer: While the IRS evaluates your offer, you submit an initial payment with your application and continue to make monthly payments. Upon acceptance, you will continue to make payments until the full amount of the offer is paid, which is typically within 24 months.
Common Mistakes to Avoid
To prevent problems with your Offer in Compromise, avoid these common mistakes:
- Low-balling the Offer: Rejecting an offer that is significantly lower than your RCP is possible. It is imperative that your proposal is both reasonable and indicative of your financial capacity.
- Neglecting Asset Valuation: Conduct an accurate evaluation of the value of your assets. Your offer may be rejected or declared non-compliant if assets are overlooked or undervalued.
- Incomplete Documentation: Ensure that all necessary forms and documentation are submitted. The process may be delayed or rejected as a consequence of incomplete submissions.
What Transpires During the IRS Review?
Several events transpire during the IRS’s evaluation of your offer. While reviewing your offer, the IRS suspends the majority of collection activities, including wage garnishments and bank levies.
Your tax liability is reduced by any non-refundable payments you make. You have the ability to specify the manner in which these payments are administered. While your offer is being reviewed, the IRS may submit a lien to protect the government’s interest in your assets.
Response and Timeline
The IRS typically assesses and responds to an OIC within six months; however, it may require up to two years. Your offer is automatically accepted if the IRS does not make a determination within two years of receiving it. You have the right to appeal the decision within 30 days if your offer is rejected.
Alternatives to an Offer in Compromise
If an Offer in Compromise is not appropriate for your situation or is rejected, you may wish to consider the following alternatives:
- Installment Agreement: Pay your tax debt in monthly installments over a period of time.
Currently Not Collectible Status: The IRS may temporarily suspend collection activities if you are unable to pay any amount due to financial hardship. - Bankruptcy: In certain circumstances, the filing of a bankruptcy petition may facilitate the discharge of specific tax debts.
Contact Delia Law
It is necessary to conduct a thorough examination of your financial circumstances to determine the appropriate amount to submit in an Offer in Compromise to the IRS. Although the process may be intricate, enlisting the assistance of Delia Law can increase the likelihood of a successful result. Contact us today for more information.
