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If an individu
al has a sizable tax debt, minimum assets and income prospects, and can fulfill the right circumstances, the IRS may accept an Offer in Compromise (OIC) to settle unpaid tax accounts for less than the full balance due. This applies to all taxes, including any interest, penalties, or other additional amounts arising under the Internal Revenue laws.
The OIC program is an option only for those taxpayers who are unable to pay their tax account in a lump sum or through an installment agreement and have exhausted their search for other payment arrangements. The IRS may legally compromise a tax liability for one of the following reasons:
• Doubt as to liability – there is doubt as to whether or not the assessed tax is correct;
• Doubt as to collectibility – there is doubt the taxpayer could ever pay the full amount of the tax owed. In these cases, the total amount owed must be greater than the sum of the taxpayer’s assets and future income; or
• To Promote effective tax administration – there is no doubt that the assessed tax is correct and no doubt that the amount owed could be collected, but the taxpayer suffers from an economic hardship or other special circumstances which may allow the IRS to accept less than the total balance due.
In reviewing the OIC, the IRS will make a determination as to what is an acceptable offer by observing those amounts that can be collected from other parties (e.g., transferee liability) as well as assets and income that are available to the taxpayer but beyond the reach of the government (e.g., certain tenancy by the entirety property). The amount that can be collected from the taxpayer’s assets is based on the quick sale or liquidation value of the taxpayer’s assets, less encumbrances senior to the federal tax lien. The IRS also considers amounts that may be collected from the taxpayer’s future income. Thus, the OIC must not only exceed the net realizable equity of the taxpayer’s assets, but must also take into account any collection potential from the taxpayer’s income.
There are three types of OIC payment terms that the IRS and the taxpayer may agree to:
• Lump Sum Cash – must be paid within 5 or fewer installments from notice of acceptance.
• Short Term Periodic Payment – must be paid within 24 months (2 years) from the date the IRS receives the OIC.
• Deferred Periodic Payment – must be paid within 25 months or longer, but within the time remaining on the 10-year period for collection.
In order to file for an OIC, the taxpayer must submit IRS Forms 656 and 433-A as well as their first proposed payment and an application fee of $150. While the OIC is being considered, there should be no levy, lien, or other enforcement action taken. OICs are very difficult to obtain and an experienced tax attorney should be consulted before contacting the IRS. If you have tax issues and need help resolving them before the IRS, contact an Attorney in Jacksonville who can assist you today.