IRS Compromise Help » Offer in Compromise

Offer in Compromise for Doubt as to Liability

Tripp — Sat, 03 Sep 2011 19:23:08 +0000

Another type of offer in compromise is based on doubt as to liability. This type of offer in compromise is very different from the one based on doubt as to collectability because you are telling the IRS you do not feel that you do not have to pay the taxes because you are not liable for the taxes. This type of offer in compromise is unusual because when there is a chance that you are not liable for the taxes that the IRS claims you owe there are many other avenues to resolve those questions.

A “Doubt as to liability” exists where there is a genuine dispute as to the existence or amount of the tax liability. Grounds for compromise may exist when there is legitimate doubt from both the viewpoint of the taxpayer and the IRS. Validity of the DATL-OIC is determined by evaluating the supporting evidence and circumstances.It is the taxpayer’s job to submit documentation and other evidence to support his claim that the tax liability is not correct.

Offer in Compromise based on Doubt as to Collectability

Tripp — Sat, 03 Sep 2011 19:16:06 +0000

There are three main types of offers in compromise that you can submit to the IRS. The most common is the offer in compromise based on doubt as to collectability. The essence of this type of offer in compromise is this: you are telling the IRS that you agree that you are liable for the taxes, interest and penalties that have accrued against you, but you can’t afford to pay them. Since you cannot afford to pay the taxes in full you are requesting that the IRS take a reduced amount for this. No doubt you have seen the late night television commercials stating that they can help you settle your taxes for “pennies on the dollar.” They make it sound so easy. So automatic. My friends, it is not always that easy or automatic. It all depends on your individual financial situation at the time you file your offer in compromise. When I say your “financial situation” what I am talking about is your current income, your monthly expenses, and the equity that you have in the assets that you own. Figuring out your income is usually the easy part. However, I know that many of you are self-employed but that you do not keep good records and it is hard to determine what you actually earn. In this situation it takes a lot more work to determine what to put in this line on the IRS forms. BUT, you have to do this work – for a couple of reasons. First, it is just good business for you to keep good records and stay on top of your company’s finances. How else do you know how well your company is doing? Second, the IRS is going to require you to prove to them what you say your income is. They do not simply just take your word for it. If you work for a company, then it is much easier to determine your income. Simply look at your most recent paystub and determine what your average monthly income is.

Now, where the IRS really gets you is on the expense side of the equation. Most people do not live extravagant lifestyles. They are simply trying to get by from one month to the next or maybe even one week to the next. You have a mortgage or rent payment, the usual utilities like power, water, gas, cable and telephone, a car or two, some monthly prescriptions, and so on. Here’s the catch: for many of the expenses you will list on your financial statement the IRS has “national standards” that they will allow as your monthly expenses. The problem with these national standards is that they are lower than what the average person spends on these monthly expenses and they do not changes very frequently so they will not take into consideration things like gasoline that costs $4 per gallon. So if, for example, you have a family of three and your mortgage payment is $1,500 per month, the IRS may only allow $1,100 per month as the national standard for your area. So right off the bat you are $400 in the hole. Most Americans do not know about these national standards until it is too late when dealing with the IRS and they have already lost their fight for an offer in compromise. The IRS will require that you provide lot of information about your monthly expenses like receipts, bills, invoices, mortgage statements, bank statements, etc. The process of gathering the material to include with your financial declaration can often take days if you are not of the organizational variety.

Finally, the IRS looks at your net realizable equity in the assets that you own. Basically, what this means is that you have to come up with the cash value of the assets that you own. But the IRS does not use the original retail price for your assets, but rather a discounted price similar to what you would get if you HAD to sell your assets in a very short time. That is good news. And just like before, you will have to provide documentation supporting your valuation of your assets such as Kelly blue book statements for your cars, a recent appraisal for your house if you have one or some other way to value the real estate, appraisals for jewelry, etc.

After you have provided this information the IRS will closely scrutinize every line. Remember, most IRS offer examiners are very nice and pleasant to deal with but they are not on your side. They are trying to find a way for you to pay a larger amount in your offer in compromise or for your offer to be rejected altogether.

Submitting an Offer in Compromise

Tripp — Wed, 20 Jan 2010 03:39:38 +0000

What is involved in submitting an offer in compromise? Is it just a short application? Unfortunately, no. The process of submitting an offer in compromise is fairly tedious. It requires you to complete several in-depth IRS forms about your financial situation to help you (and the IRS) determine if you will qualify for an offer in compromise. You must also fill out the offer in compromise application (form 656). Along with you financial information you will be required to gather a minimum of three months bank statements, mortgage statements, and other bills and receipts to prove your monthly living expenses.

Once you have completed your paperwork, you must submit an application fee of $150.00 and a down payment of an amount determined by the type and amount you are offering to the IRS. Common down payment values are 20% of the offer in compromise amount if you are doing a lump-sum payment or the first month’s payment if you are making monthly installments on your offer in compromise.

When you submit your offer in compromise, I suggest that you mail it to the IRS via US Certified Mail, Return Receipt Requested so that you can prove the date the IRS received your offer in compromise. This rule applies to everything that you send to the IRS. I can’t tell you the amount of times that I have had to call the IRS on the carpet for dismissing/denying an offer in compromise because they claimed they did not receive a requested document and I was able to prove that they, in fact, did receive the documents on time.

Hope that helps with your offer in compromise submissions.

Question from a Reader: Will the IRS Usually Accept an Offer in Compromise?

Tripp — Thu, 12 Nov 2009 14:30:42 +0000

Recently, I was asked by a reader: “Will the IRS usually accept an offer in compromise when you owe taxes?”

“Usually” is probably not the right word. But, in the right circumstance, the IRS will accept an offer in compromise every time. You must show the IRS that you do not have the future income or the assets to pay for your tax liability in full before the IRS will accept your offer in compromise. This is done by providing the Form 433-A with the filing of your offer in compromise to show the IRS a total financial picture for your life. The only changes the IRS will make to this form is to ensure accuracy of the value of your assets, but more likely is that they will adjust your monthly living expenses – and by adjust I mean reduce – to be in line with the IRS national standard expenses. If you can show the IRS through the Form 433-A along with the other documents and substantiation that they require you to provide that you do not have enough future income or equity in assets to full pay your IRS tax debt then the IRS will accept your offer in compromise.

Offer in Compromise for Effective Tax Administration

Tripp — Wed, 11 Nov 2009 13:15:59 +0000

There are several different types of offers in compromise: doubt as to collectability (what we usually talk about and the most common type of offer in compromise which states that you simply do not have the money to be able to full pay your tax debt), doubt as to liability (where you believe you are not liable for the tax the IRS is trying to assess against you) and for effective tax administration. This offer in compromise based on effective tax administration comes into play when you know you owe the tax liability and you go through the financial information like in the offer based on doubt as to collectability and it appears you can full pay your tax liability. But, even though your financial declaration shows that you have assets and/or sufficient income to full pay your tax liability it would cause you an economic hardship.

So what does this mean exactly? Well, a common example would be a person who is advanced in age and has some severe medical problems that prevent him from working and earning an income beyond Social Security. While his home is paid for and he has a retirement account that if sold and cashed in, respectively, could pay for the tax liability he owes. However, if he cashes in his retirement account and sells his home he will be 100% relying on the federal and state governments to provide for ALL of his needs including shelter, healthcare, food, medication, medical care, and on and on. When you boil it down, this type of offer in compromise requires you to show the IRS why requiring you to full pay your tax liability would have such a negative impact on you.

Can I File an Offer in Compromise after Setting up an Installment Agreement?

Tripp — Tue, 10 Nov 2009 11:34:03 +0000

Setting up an Installment agreement can be a challenge, but it is also a great way to resolve some IRS cases. Very simply put, an installment agreement is a way to pay off your tax debt with a monthly payment plan. You may full pay your tax debt or you may not, depending on the amount you are paying each month and the time remaining for the IRS to collect against you. However, the very best way is when you can successfully negotiate an offer in compromise to settle your case for much less than you owe. People that I have worked with in the past have been wary of setting up an installment agreement (even when it was absolutely necessary to prevent or stop a levy from happening) because they did not want to foreclose the option of being able to file an offer in compromise to settle their IRS debt.

What I told them, and what I am sharing with you is that setting up an installment agreement does not prevent you from being able to submit an offer in compromise and resolve your case that way with the IRS. In some circumstances, this may just help you because it will already let you konw what type of financial information the IRS requires when submitting an offer in compromise and you may even have some of the forms required for an offer in compromise completed with only a little updating required before you can submit your offer in compromise.

Bottom line: the installment agreement will not prevent you from filing an offer in compromise.

Decision Timeline: How long until the IRS makes a Decision on my Offer in Compromise

Tripp — Mon, 09 Nov 2009 18:33:48 +0000

Question: I have filed an offer in compromise and want to know what the average time is for the IRS to approve my offer in compromise and finalize the process.

Answer: I’m glad that you have filed your offer in compromise and taken the first step towards resolving your tax problems with the IRS. The time for an offer in compromise to be resolved varies from case to case, but is generally a pretty long process. The typical offer in compromise takes about 9 months to complete. This includes the time it is being examined and potentially an appeal should your offer in compromise not be accepted the first go around.

Usually, after you file your offer in compromise it will take about a month for the IRS to send you a letter that states the IRS has received your offer in compromise and is going to be assigned to an offer examiner for review. About 30 days after that you will receive a letter from the offer examiner requesting more information or clarification on the information that you sent the first time. After that, the time will depend on the complexity of the issues in your case and whether you are asking the IRS to depart from any standard expenses or to overlook any assets to grant your offer in compromise.

Sometimes having the extra time comes in handy when you are having to wait on documents from a bank or mortgage company to send to the IRS, but on the other hand it can be kind of frustrating when you are just really ready to get the case over.

While there is no real time table in place for the review of your offer in compromise a law that went into effect in 2006 requires the IRS to finalize the review of your offer in compromise within two years of your filing the offer in compromise or the offer is automatically accepted. While many cases take a long time (well over a year) to complete, I have never had get accepted because the two years passed.

Do I Have to Pay Money when I Submit my Offer in Compromise to the IRS

Tripp — Sun, 25 Oct 2009 03:17:52 +0000

In the good ole days you could submit your offer in compromise to the IRS and it wouldn’t cost you anything except a filing fee. So, it didn’t matter how much you were offering to settle your tax debt with the IRS you knew that you were going to have several months before the IRS accepted your offer in compromise and then you would have several months after your offer in compromise was accepted to pay it in full. Things changed in 2006.

In 2006, the code was changed and a prepayment requirement was added. Now, when you submit your offer in compromise to the IRS you must pay a $150.00 application fee along with some payment towards your offer in compromise. The payment you have to make depends on the amount and type of offer in compromise you are making.

If you are making a lump sum offer in compromise payable within five months from acceptance of your offer, you must submit a 20% down payment with your offer in compromise.

If you are offering to make installment payments for 24 months, you must make the first month’s payment with your offer in compromise and continue making those payments throughout the entire time your offer in compromise is being considered.

These payments are non-refundable, so if your offer in compromise is rejected by the IRS then they will keep this money and apply it to your income tax debt. You can request what years you want your payments to be applied to when you submit them. If you do not request the payment to be applied in a specific way, the IRS will apply it in the way most beneficial to the IRS.

While 20% or the monthly payments may not sound like much, in my time representing clients with tax problems before the IRS I have noticed that many times the 20% requirement is the difference in whether the taxpayer will be able to afford to submit their offer in compromise or not – even if the overall offer in compromise would save them thousands and thousands of dollars.

The only exception to this is if your income meets the poverty guidelines as set out by the IRS in the Form 656 – Offer in Compromise publication. If you satisfy these requirements, you will be required to submit an affidavit stating your income and how it qualifies for not having to pay an application fee or down payment and then the IRS will consider your offer in compromise without the money.

If you do not qualify for that exception and you do not send the correct amount of money with your offer in compromise, you can rest assured that your offer in compromise will be returned to you without any consideration by the IRS.

Submitting an IRS Offer in Compromise after Divorce

Tripp — Wed, 30 Sep 2009 15:56:29 +0000

Going through a divorce can muddy the waters when it comes to whose responsibility the IRS tax liability becomes. In a divorce case, the Court could order that one party of the other is solely responsible for the tax liability. However, because a family court is a state court it does not have authority to order the IRS to only seek repayment of the tax liability from one of the parties if the original tax liability is a joint liability.

That means if you and your former spouse have joint liability with the IRS the IRS can come after both of you even if your spouse is ordered by the family court to pay all of the debt.

So what can you do? You may qualify for an offer in compromise. If you file an offer in compromise, you can negotiate and settle your tax debt with the IRS and not have to worry about them coming after you any more. The total tax debt you and your former spouse owe would be reduced by the amount that you and the IRS agreed to and your spouse would be liable for the balance due.

At this point, you could be “made whole” by contacting your divorce attorney to work on a contempt action against your former spouse in family court since you had to come out of pocket and pay some money to the IRS when the family court had already ordered your former spouse to do it.

If your divorce order was silent about the tax liability then you can file an offer in compromise separately from your former spouse. Your offer in compromise will not affect their liability, however, so you will only be settling on behalf of yourself. Your former spouse would be required to file an offer in compromise or work out some other type of resolution with the IRS for the tax debt on their own.

Do I have to provide Bank Statements to the IRS

Tripp — Fri, 04 Sep 2009 12:58:11 +0000

When you are filing an offer in compromise with the IRS you have to give the IRS a lot of financial information and proof. They want to see the last three months of bank statements, pay stubs, utility bills, investment account statements, medical bills and more. You can almost picture the offer in compromise program as wanting the same type of information as if you were being audited and had to prove why you claimed certain deductions on your income tax return.

All of this financial information has to be provided at the beginning of the filing of the offer in compromise and is usually required to be updated during the offer in compromise process (perhaps even several times) because of the length of time it takes to for the offer in compromise to be examined.

Now, if you are setting up a monthly payment plan (or installment agreement as the IRS calls it) you may or may not be required to provide financial information and bank statements. If you owe the IRS less than $10,000 and you can pay it off in 36 months, the IRS will automatically set up an installment agreement for you.

The next scenario is if you owe the IRS less than $25,000. When you owe less than $25,000 you do not necessarily have to provide financial information and bank statements as long as the total tax, penalties and interest will be paid off during the statute of limitations for collection. Many times the IRS will ask you what you want to pay and then they will tell you if that will pay off the debt or not. If it will they will then set up your installment agreement. If your offer will not pay off the tax in time, the IRS will tell you what the minimum payment will have to be. If you cannot afford that payment you will have to provide financial information to the IRS.

If, however, you cannot afford the payment that the IRS must receive to pay off the debt in 36 months or less (if you owe less than $10,000) or if you cannot pay off the tax before the end of the statute of limitations (if you owe less than $25,000) then you would have to provide all of the financial information to prove that you do not have that much disposable income every month and need a lower payment amount for your installment agreement.

When you owe the IRS more than $25,000, you must provide financial information to the IRS and your monthly payment will be what the difference in your income and allowable monthly expenses is.