An offer in compromise is an agreement between the IRS and the taxpayer to settle the taxpayer’s back taxes for less than what is due and owing. Currently, the IRS will accept less than the full amount of tax due if:
• it is satisfied that it will not be able to collect the full amount of tax due, and
• the amount offered in settlement is reasonable based upon the taxpayer’s ability to pay.
If you need assistance filing an IRS Offer in Compromise, the tax attorneys and enrolled agents at Gatherwright Freeman can help. Click here to schedule an appointment.
Will the IRS accept my offer in compromise?
Yes, if you meet certain criteria the IRS will negotiate a settlement of the amount of taxes you owe.
In 1992 Congress admonished the IRS to become more reasonable in its collection efforts. In response the IRS issued Policy Statement P-5-100 which states that the IRS “will” accept offers in compromise [1]. Prior to 1992, the IRS had complete discretion as to whether to accept an offer in compromise.
How do I file an Offer in Compromise?
• Prepare and submit: (1) the applicable Form 656 Offer in Compromise [2] and (2) the applicable Form 433 Collection Information Statement [3].
• The taxpayer should also up to date on this year’s current taxes. Old taxes are negotiated in the offer. Current taxes should be paid or the IRS may reject the offer. If you are on W-2 withholding that is probably going to be considered current. If you are self-employed you may need to make an estimated tax payment.
• The dollar amount the taxpayer will offer the IRS to settle the taxpayer’s taxes is submitted to the IRS on the Form 656 Offer in Compromise.
• The taxpayer must also submit the necessary Form 433 Collection Information Statement wherein the taxpayer discloses all of the taxpayer’s income and expenses and provides supporting documentation, such as bank statements and proof of loan payments.
How much should I offer the IRS to settle my back taxes in an offer in compromise?
The answer to this question is different for every taxpayer. However, in very simplistic terms, the IRS uses the data collected on the Form 433 Collection Information Statement to arrive at two figures:
• The net equity of a taxpayer’s assets.
• The taxpayer’s disposable income at the end of each month after payment of reasonable living expenses, multiplied by either 12 or 24 depending upon the payment period you choose for your offer (either five months or two years),
The IRS adds these two figures (net equity and disposable income) together and that is roughly the amount the IRS will accept, but this is subject to a lot of rules and exceptions, many that favor the taxpayer if you know the rules and what information to present.
So, while our tax attorneys can have a general conversation with you about the amount of your offer in compromise at your initial meeting – how much do your make annually, what is your house worth, what is your mortgage, retirement, investments, how many children do you have – we cannot arrive at a completely accurate estimate until we have prepared and reviewed all of the data on the necessary IRS Form 433 Collection Information Statement and we have considered any special circumstances you may have (disabilities, health problems, single parent, bankruptcy, the list goes on and on…).
Every situation is unique. For example, four taxpayers could each owe $100,000 in back taxes, but all settle their taxes for different amounts for various reasons:
• If taxpayer #1 makes $40,000 annual salary and has no significant assets, he might settle his debt for $2,000 because he needs most of his income for his living expenses.
• If taxpayer #2 makes $40,000 annual salary and has $50,000 in her 401(k), the IRS might settle her debt for the after-tax value of the 401(k) that being about $35,000 because while she needs most of her income for living expenses, she can liquidate the 401(k) to pay a settlement.
• If taxpayer #3 makes $40,000 annual salary and has $50,000 in his 401(k), the IRS might settle his debt for $1 if his lawyer points out that he is 69 years old and has health problems. In this instance the taxpayer needs most of his income for his living expenses and may have to withdraw money from his 401(k) in the foreseeable future to pay medical bills or to live on if he is no longer able to work.
• If taxpayer #4 makes $40,000 annual salary and has $50,000 in her 401(k), the IRS might settle her debt for $1 if her lawyer points out that she is a single mother of five children. In this instance the taxpayer may need not only her current income but also her 401(k) for her living expenses.
How do you fill out a Form 433 Collection Information Statement for an IRS Offer in Compromise?
The answer to this question is different for every taxpayer. Determining the taxpayer’s net equity and disposable income is complicated and requires professional assistance to be done properly and effectively. The IRS has a set of allowable expenses that it is supposed to accept when determining a taxpayer’s monthly ability to pay but not all IRS personnel are properly trained or play by the rules.
The IRS may tell you that your living expenses are too high and that you are limited to their national standards for food, clothing, and healthcare and their local standards for housing, utilities, and transportation. This is not always true, and there are conditional expenses IRS personnel are supposed to accept under certain circumstances, yet routinely deny, such as credit cards, dependent care, and student loans. Our staff knows the rules and makes sure they are followed.
The IRS may say that based upon your financials you can afford to full pay your taxes. In truth, you can request the IRS to consider accepting your offer in spite of your perceived ability to pay if you can otherwise show a financial hardship or if you can demonstrate that acceptance of your offer in compromise would be fair and equitable.
If you need help with your IRS Offer in compromise, please contact us to schedule an appointment with one of our tax attorneys or enrolled agents.
Endnotes
1. Internal Revenue Manual § 5.8.1.1.2 https://www.irs.gov/irm/part5/irm_05-008-001
2. The IRS uses the Form 656 Offer in Compromise https://www.irs.gov/pub/irs-pdf/f656.pdf to accept most offers in compromise; but see Form 656-L https://www.irs.gov/pub/irs-pdf/f656l.pdf for Doubt as to Liability Offers.
3. The IRS uses the Form 443A-OIC https://www.irs.gov/pub/irs-pdf/f433aoi.pdf to compute an individual taxpayer’s income and expenses and the Form 433B-OIC https://www.irs.gov/pub/irs-pdf/f433boi.pdf to compute a business taxpayer’s income and expenses.
