If you owe more in back taxes than you have in assets and income, the IRS might supply a solution. An IRS Offer in Compromise (OIC) is an agreement between the taxpayer and the IRS to settle the taxpayer’s liabilities for less than the full amount owed. Nevertheless, there are strict requirements for an OIC and they are only granted in limited cases. The most common ground for an OIC is if there is doubt as to the collectability of the tax debt.
An OIC on the basis of doubt regarding collectability enables a taxpayer to “jeopardize” a liability if the taxpayer’s assets and income are less than the full amount of the liability. In making that determination, the IRS generally looks at whether the amount provided reflects the reasonable collection potential (” RCP”) of the financial obligation.
RCP is defined as “the amount that can be collected from all offered means, consisting of administrative and judicial collection treatments.” The taxpayer’s RCP is the sum of these amounts:
The IRS looks at the amount collectible from the taxpayer’s net feasible equity in assets.
Future income. This is the amount collectible from the taxpayer’s expected future income after enabling payment of required living expenses.
Quantities collectible from third parties. The amount the IRS might fairly anticipate to gather from third parties through administrative or judicial actions is consisted of.
Assets and/or income that are available to the taxpayer but are beyond the reach of the federal government. For instance, assets to which a lien will not attach, such as equity in assets situated outside the nation, are still thought about in identifying the RCP.
In figuring out the taxpayer’s future ability to pay, the IRS must consider the taxpayer’s overall basic circumstance including such factors as age, health, marital status, number and age of dependents, education or occupational training, work experience, and present and future work status.
To determine the RCP of a taxpayer, the taxpayer needs to complete and file (as suitable) Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals, or Form 433-B (OIC), Collection Information Statement for Businesses, with supporting documents to corroborate the taxpayer’s assets, liabilities, income, and needed living expenditures. For an OIC on the ground of doubt regarding collectability and a determination of financial hardship, the taxpayer needs to also send Form 656, Offer in Compromise.
Be aware that the IRS normally conducts an intensive evaluation of a taxpayer’s current monetary status prior to thinking about acceptance of an OIC. Offers will not be accepted where the tax can be paid in full as a swelling amount or can be paid under present installation agreement (IA) standards, unless unique circumstances are determined that call for factor to consider of a lower amount. For more detailed directions on sending an offer, taxpayers can speak with the IRS Offer in Compromise Booklet. It is essential to keep in mind that while an offer is pending, a Notice of Federal Tax Lien may be filed, however all other collection activities are suspended.