People who owe federal taxes but have not yet paid them can be penalized with stiff fines. Sometimes those fines can amount to more than the initial taxes owed, and that is a real problem. The Internal Revenue Service (IRS) has programs designed to help, but the other problem is this: Lack of knowledge. To benefit from one of these programs, like Offers in Compromise (OIC), you need to know they exist, which type of offer is best, and how to go about benefiting it.
At McGinn Law Firm, our tax lawyer in New Jersey helps taxpayers negotiate and settle their tax debt and obligations to a favorable end. Offers in compromise are often an essential tool to position taxpayers in a good position to pay what they owe but less than what they have been fined. Contact our tax attorney in Toms River at 908-601-7177 to schedule a consultation and get the assistance you need to satisfy your tax obligations.
What is an Offer in Compromise?
An offer in compromise is an agreement with the IRS that allows you to settle your federal tax bill by paying less than you owe.
The IRS typically advises you if an OIC may be available to you. It's then up to you to propose the amount of the offer in compromise for the IRS to consider.
If you are unable to pay your tax debt, an offer in compromise may be a good way to solve the issue. You should speak to our tax attorney in New Jersey for smart advice on whether an offer in compromise is available to you and, if so, is a good option given the facts and circumstances.
Offer in Compromise Qualifying Criteria
To benefit from an OIC, you must qualify for it. Qualifying means you must have:
- Received a tax bill that you want to settle
- Filed all of your required tax returns
- Paid all of your estimated tax payments
- Made all your federal tax deposits
You also must not be involved in an active bankruptcy case.
If you do not qualify for an offer in compromise, other opportunities exist. So, that is why you should reach out to our tax attorney to discuss your unique circumstances and identify the best strategy for moving forward to solve your state or federal tax issue.
Three Types of Offers in Compromise
When you qualify for an offer in compromise, you must determine which type of offer in compromise is best for your situation. Failing to do so can result in delays and other challenges, which can all add to your tax liability. The three types of offers in compromise involve doubt as to collectibility, doubt as to liability, and exceptional circumstances.
1. Doubt as to collectibility
The most common type of offer in compromise, doubt as to collectibility applies when you do not have enough financial resources to pay your tax bill. It allows you to settle your tax bill based on what you can afford according to your “reasonable collection potential,” which is the amount the IRS can expect to collect from you based on your assets and available income.
2. Doubt as to liability
This type of offer in compromise is available where you believe the IRS has miscalculated the amount of your tax liability. The miscalculation may be due to an error made by the IRS, your accountant, or you. If successful, a doubt as to liability offer in compromise corrects your tax bill, with the IRS waiving the miscalculated portion.
You cannot seek a doubt as to liability offer in compromise if a final court judgment or decision has been made in your case.
3. Exceptional circumstances or effective tax administration
If you do not qualify for doubt as to collectability or doubt as to liability, you may be eligible for an exceptional circumstances offer in compromise. You need to demonstrate that while you are able to pay the full debt, doing so would be unfair or cause you extreme economic hardship.
There are limited situations where the IRS agrees to an offer in compromise based on exceptional circumstances.
Calculating an Offer in Compromise
If you are considering proposing an offer in compromise to the IRS, you need to calculate the value of your offer. To increase the chances of the IRS accepting it, your offer should be reasonable and made in good faith. On its face, calculating an amount may seem relatively straightforward, but many variables must be considered.
A formula to calculate an offer in compromise involves taking your available monthly income and multiplying it by the number of months in the repayment plan and adding to it the total value of your personal assets. In other words,
(Available Monthly Income x Number of Months in Repayment Plan) + Value of Personal Assets
You must first come up with a value for each of these three "variables". The IRS is very specific on this part.
Available Monthly Income
Your available monthly income is your monthly income minus your monthly expenses. Basically, this refers to what you have available to spend on non-necessary items each month, and thus what you can apply toward your IRS tax bill.
Common examples of income include:
- Wages
- Net business income for business owners
- Social Security payments
- Child support
- Spousal support
- Distributions from an account, like a retirement account or trust fund
You will have to list income, using IRS Form 433-A for individuals and Form 433-B for businesses. The forms also list documents you will need to attach to the form to prove your income.
Expenses include things like:
- Rent or mortgage
- Utilities
- Medical expenses
- Vehicle expenses
- Food
- Current year's income taxes
Keep in mind, though, the IRS caps the amount you can claim under each category of expenses.
Total Value of Your Personal Assets
The IRS also takes into consideration the value of your personal assets. This part of the equation is the current market value of all of your assets combined, which includes things like:
- Property
- Vehicles
- Cash
- Cryptocurrency
- Stocks and bonds
- Furniture
- Jewelry and collectibles
- Tools
- Other personal effects
These assets will also have to be listed on Form 433-A or 433-B, respectively.
Number of Months in the Repayment Plan
The number of months in the repayment plan depends on which way you intend to pay an offer in compromise, but there are only two ways:
- 5-month repayment plan, which uses the number 12 in the formula to represent 12 months; or
- 24-month repayment plan, which uses the number 24 in the formula to represent 24 months.
The 5-month repayment plan requires a lump sum to be paid upfront. This lump sum must be 20% of the offer. The remaining amount should be paid monthly within 5 months of IRS acceptance of the offer in compromise.
The 24-month repayment plan, known as the periodic payment plan, is for taxpayers who cannot pay a lump sum and need additional time to pay. You do not need to take the full 24 months, but can opt for a shorter term anywhere between six to 24 months. If you do choose a shorter repayment period, the number 24 is still inserted into the formula.
An Example of an Offer in Compromise
As an example, let's say you receive a tax bill for $30,000 that you're unable to pay. You calculate that your monthly income is $1,600, and monthly expenses is $1,200, meaning your monthly available income is $400. Then, you calculate that your total assets are worth $4,500.
If you want to make a lump sum offer in compromise, your offer amount is:
($400 x 12) + $4,500 = $9,300
As you would be required to make a 20% upfront payment, you would need to pay an initial $1,860. The remaining $7,440 would be paid in monthly installments of $1,488 for the next five months.
If you want to make an offer in compromise based on a 24-month repayment plan, your offer amount is:
($400 x 24) + $4,500 = $14,100
In this example, the monthly payment would be $587.50 for 24 months.
As you see, if you choose to pay back tax debt over a longer period of time, the total sum is more than if you settle for the shorter 5-month repayment plan.
Factors to Consider before Offering a Compromise to the IRS
Offers in compromise benefit those who qualify in a number of ways. First, an offer in compromise makes paying tax dabe more affordable. By reducing the overall tax debt and allowing monthly payments, many taxpayers can better afford to satisfy their tax obligations. An offer in compromise also prevents the IRS from trying to collect on the debt by garnishing your earnings or seizing your assets, like bank accounts, which is significant for taxpayers living paycheck to paycheck. Finally, an offer in compromise allows taxpayers to resolve their tax issues with the government, which can be a big relief.
Though the benefits are many, taxpayers considering an offer in compromise should also think about the potential consequences.
Deeper Scrutiny of Finances
When a taxpayer makes too much money or has too many assets that could, if liquidated, be used to pay the debt, your offer in compromise will be denied. That's not the only problem here. If your offer in compromise is rejected, it increases the chances that the government will more deeply inquire into your finances and assets, which could create additional problems.
Inability to Claim Tax Credits
If your offer in compromise is accepted and you settle for less than you owe, then any tax credits from which you might benefit in the future may have to be forfeited the following year.
Loss of Privacy
Once the IRS accepts it, an offer in compromise becomes part of the public record. As a result, you lose the ability to keep your financial matters regarding the offer in compromise private.
Right to Appeal a Rejected OIC
Not hearing back about an OIC does not mean it has been rejected, necessarily. The IRS can take years to accept an OIC, and so if you do not receive a determination within two years of the IRS receipt date, then your OIC is automatically deemed accepted.
However, if you receive a rejection, you still have an option: you can appeal it. You have 30 days upon receipt of the rejection to request an appeal, using Form 13711. Appealing a rejected OIC could be a good idea, but like the initial OIC, there are some caveats. Speak to our tax attorney in New Jersey to make sure what options you have aside from an appeal to ensure you make an informed decision.
Contact a Tax Attorney in Toms River Today
As a taxpayer in New Jersey, you have no legal right to settle your debt for any less than you owe, but you have a legal obligation to pay your tax debt, including any added fines or interests. The IRS has full discretion to settle or to accept an offer in compromise. This discretion is reason alone why your offer in compromise must be solid. You must be able to support your offer in compromise or have strong arguments to make for any other type of settlement.
At McGinn Law Firm, our tax attorney will provide strong and smart representation. We work diligently toward a favorable outcome. Contact us either by calling us at 908-601-7177 or completing the online form. We will schedule a consultation accordingly and get you moving in the right direction to fulfill your tax obligations.