Settling Tax Debts

An Offer in Compromise or a settlement offer is a formal way to negotiate tax debts with the Internal Revenue Service.   It is a lengthy and time-consuming process and sometimes takes from 12 months to 24 months to achieve a successful resolution on the offer application. It is a program has been misunderstood by many debtor consumers and abused by unscrupulous tax preparers.   The odds of succeeding are slim, only about 16% of offers succeed in reducing the debt in the Offer in Compromise program.   Taxpayers agree through a settlement offer to pay the IRS only the reasonable collection potential instead of the full amount of taxes owed which for some people will be less than the full amount of taxes owed – sometimes far less.

The Offer-in-Compromise (OIC) program is the only way to settle tax debt for less than what is owed.   All applicants in the Offer in Compromise (OIC) program must begin making payments on their proposed settlement amount. There are three payment options: lump sum payment, monthly payments over 24 months or less, or monthly payments over the remaining statute of limitations.   Settlement applicants must submit a 20% down payment if they choose a lump sum payment plan, or must begin making monthly payments if they choose one of the two monthly payment options.

Agreements to Settle Tax Debts

The IRS sets forth all the Contractual Terms in an Offer in Compromise.   The taxpayer must agree to:

• Pay the offer amount stated in the Offer in Compromise.
• File all subsequent tax returns on-time and pay all taxes on-time for the next five years.
• Let the IRS keep any tax refunds, payments, and credits applied to the tax debt prior to submitting the Offer in Compromise.
• Let the IRS keep any tax refunds that would have been payable to the taxpayer during the calendar year in which the Offer in Compromise is approved.
• If the taxpayer does not fulfill the terms of the Offer contract, the IRS can revoke the Offer in Compromise and reinstate the full amount of tax liability.

Tax Debt Settlement Problems

The caution light is blinking to note that a large number of Offer in Compromise applications are “returned to sender” due to being unable to process by IRS staff. An Offer cannot be processed if it is missing any of the required forms, backup documentation, or if no payment is enclosed or a request for a fee waiver.

A taxpayer must first fulfill the following requirement to have his offer even processed by the IRS:

• Taxpayer must not have an open bankruptcy case,
• All required federal tax returns must have been filed
• Offer application fee of $150 must be included or a waiver of the fee requested  
• Taxpayer must be current with estimated taxes and income tax withholding for the current year
• Business taxpayers must have filed payroll tax returns and made on-time deposits of payroll taxes for the prior two quarters
• IRS Forms 656, 433-A, and/or 433-B must be completed and submitted along with all supporting documentation

Help from a Tax Attorney

Because of the complexity of the Offer in Compromise process, many taxpayers hire a tax professional to prepare their Offer documentation and to negotiate with the IRS. Tax attorneys can charge anywhere from $1,500 to $3,000 or more for accurate and thorough Offer in Compromise representation.  Filing an offer in compromise requires significant expertise.  A tax attorney must know about the laws governing IRS collection of tax debts, how the IRS evaluates offers, and what all the options are for resolving tax debt problems.  Even the most successful tax attorneys have lost Offer in Compromise cases. It is also important to know that each Offer in Compromise will be decided based on that unique financial situation.  The tax attorney must know how to handle an offer rejection and how to create a backup strategy for handling the tax debt since the IRS approves so few Offers.