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There are a lot of organizations out there that amass huge profits by making big bucks off people who are already heavily indebted to the IRS for unpaid taxes. These organizations make all sorts of glorious promises in their advertisements, declaring how they can marvelously reduce your tax bill to a mere fraction of what you owe. Some even promise to reduce your tax bill to 10 percent or less of what you owe. They all claim that they have CPAs, Enrolled Agents, and attorneys who are all unique in their expertise, and who are all at your disposal for fast, free, and confidential consultations. They usually assert that their lawyers are former tax enforcement or other government officials who will use their unique understanding of procedural rules and their extensive experience in dealing with the IRS to develop creative approaches to solving your problem. After they get you hooked, they usually require substantial, non-refundable up-front fees before they will proceed with your case.
This all sounds good on paper, but if you are shrewd enough to read the fine print, you will discover that there is always a disclaimer somewhere stating that they cannot guarantee what they have promised. How convenient. So, in essence, you might end up paying them substantial amounts up-front, and still end up having your tax liability unchanged, thus placing you in a more dire financial position.
This is one risk no rational taxpayer should take, because no matter how good these people claim they are, the bottom line is that the IRS will not accept any offer to reduce a tax bill if it believes the liability can be paid in full as a lump sum or through an installment agreement.
So, if you owe the IRS a substantial amount (say, over $10,000) and are unable to settle your tax debt in full, you can apply the IRS for an Offer in Compromise (OIC), and you can do this all by yourself — you don’t need a fancy, lettered tax professional to do this for you. You only need to be honest with the IRS. An Offer in Compromise allows you to settle your tax debt for less than the full amount you owe. It’s an option available if you can’t pay your full tax liability, or if doing so would create a financial hardship for you, and you can prove this fact to the IRS.
According to IRS literature, you can apply for an Installment Agreement, Offer In Comprise, or penalty or interest abatement without the help of a third party. Also, you can contact the Taxpayer Advocate Service, an independent organization within the IRS, for free help if you are having tax problems that you haven’t been able to resolve yourself, especially if your problems are causing you financial difficulties or if you face an immediate threat of adverse collection action by the IRS.
The IRS, upon receipt of such an application, will consider your unique set of facts and circumstances, which will include your ability to pay, your monthly income and expenses, and your net asset equity.
The IRS generally approves an Offer In Compromise only when the amount offered represents the most they can expect to collect from that taxpayer within a reasonable period of time.
Submitting the Offer
You’ll find step-by-step instructions and all the forms for submitting an offer in the Offer In Compromise Booklet and Form 656-B, which you can download from the IRS website (www.irs.gov). You can also view the “Complete Form 656” video on the IRS website.
In general, your completed offer package should include the following:
- A completed Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, and all other required documentation as specified on the forms
- A completed Form 656, Offer In Compromise
- A non-refundable application fee of $186
- A non-refundable initial payment
In applying for an OIC, you must select a payment option. Your initial payment will vary based on your offer and the payment option you choose. You can choose either of the following two payment options:
- Lump Sum Cash: You should submit an initial payment of 20 percent of the total offer amount with your application. Wait for written acceptance, and if accepted, you then pay the remaining balance of the offer in five or fewer payments.
- Periodic Payment: You should submit your initial payment with your application. Continue to pay the remaining balance in monthly installments while the IRS considers your offer. If accepted, continue to pay monthly until it is paid in full.
You should note, however, that if you meet the Low Income Certification guidelines, you do not have to send the application fee or the initial payment, and you will not need to make monthly installments during the evaluation of your offer. You must check your application package for the details to see whether you qualify for the Low Income Certification.
It’s entirely up to the IRS to accept or reject your OIC, but while your offer is being evaluated, the following process takes place:
- Your non-refundable payments and fees will be applied to the tax liability (you may designate payments to a specific tax year and tax debt)
- A notice of Federal Tax Lien may be filed
- Other collection activities are suspended
- The legal assessment and collection period is extended.
- You should make all required payments associated with your offer.
- You are not required to make payments on an existing installment agreement
- You can consider your offer as being automatically accepted if the IRS does not make a determination within two years of the IRS receipt date
The good news, my friends, is that you can do all this by yourself; you only have to be honest with the IRS—they will work with you.