An offer-in-compromise (“OIC) is a formal written proposal made to the IRS to settle your tax debt for less than the amount that the IRS says you owe. The IRS receives about 10,000 OIC applications each month.
Getting an OIC approved and accepted by the IRS is a matter of proving that you qualify.
Generally, there are three different ways to qualify for an OIC:
- 1. “Doubt as to liability.” This means that you do not owe the amount that the IRS says you owe.
- 2. “Doubt as to collectibility.” This means that you agree with the IRS that you owe the amount the IRS says you owe, but you could not pay it even if you liquidated all of your assets tomorrow and gave them your monthly surplus cash for the next several years.
- 3. “Considerations of hardship, fairness, and equity” require that you not be devastated by having the IRS force you to pay what you owe if that would create undue hardship for you, even if you have sufficient assets to pay the debt and you agree that you owe the amount that the IRS says you owe. The IRS calls this “effective tax administration.”
Applying for and receiving IRS approval of offers is a difficult legal and administrative process that involves a great deal of paperwork and time. The OIC process is not a matter of making offers and counter-offers. It is not a give-and-take bartering procedure. It is very formal, legal, and mathematical process involving numerous complex calculations.
Simply wanting to make a deal with the IRS is not enough. Every American who owes back taxes would like to get a break and have a clean slate with a fresh start. The IRS is not in the habit of simply forgiving tax debts when a taxpayer does not want to pay the full amount owed.
To get an idea of the complexity of the process and what the IRS position is regarding offers in compromise, go to http://ftp.fedworld.gov/pub/irs-pdf/f656.pdf and read the instructions for the OIC application (Form 656).
Then go to http://ftp.fedworld.gov/pub/irs-pdf/p1854.pdf and read the instructions for Form 433-A (“Collection Information Statement”).
You should also go to http://ftp.fedworld.gov/pub/irs-pdf/f433a.pdf and take a look at the actual Form 433-A.
What amount should you offer the IRS? The IRS looks to the taxpayer's budget, as presented on Form 433-A or 433-B (the individual and business collection information statements that accompany Form 656) to determine the availability of money to pay taxes in the future. It also looks at the prospects of the taxpayer, including education, profession or trade, age and experience, health, as well as past and present income. The IRS will use a method of determining present value based on the taxpayer's current ability to pay.
The IRS's method for determining the adequacy of an offer roughly boils down to this equation: quick sale value of net assets plus the present value of future income. In applying that formula, the IRS determines the quick sale value [(FMV of assets minus secured debt) x 80%] of all of the client's assets and then adds that amount to the taxpayers monthly surplus cash times 48 months. It aggregates the two numbers to arrive at an offer amount that it considers acceptable.
The IRS does not take you at your word when you submit the Form 656 and the Form 433-A showing your assets, liabilities, monthly income and monthly expenses. You must document everything. Be prepared to submit the following documents to go along with the offer forms:
- 1. Copies of your three most recent bank statements.
- 2. Copies of your canceled checks for the last three months for any and all bank accounts.
- 3. Copies of your most recent brokerage statements if you have a brokerage account.
- 4. A document showing the current value of any IRA or 401-K, or any other deferred compensation or retirement plan.
- 5. Copies of your last three paystubs.
- 6. A copy of your last property tax bill on any and all real estate that you own.
- 7. Copies of your vehicle registration certificates.
- 8. Copies of any life insurance policies and documentation showing the monthly cost of the insurance.
- 9. Documentation showing how much you pay per month for car insurance.
- 10. Documentation showing how much your monthly car payment is.
- 11. Documentation showing how much you pay for health/medical insurance per month.
- 12. If you lease a car, provide a copy of the lease.
- 13. A document showing how much is currently owed on your house.
- 14. A document showing how much your monthly house payment is, or a copy of your lease if you rent your home from a landlord.
- 15. Documents showing the current balance owed on vehicle loans.
- 16. Documentation showing how much is owed for any student loans.
- 17. Documentation showing how much is owed for any lines of credit or home equity loan, second mortgage, or other debt.
- 18. A copy of your credit report from a national credit-reporting agency such as EQUIFAX or TRW.
- 19. Copies of your most recent phone and utility bills.
- 20. Copies of medical and dental bills for the last three months, including prescription medicine.
- 21. If you have an ongoing medical condition/problem, you will need to get a letter from your doctor describing your problems giving a prognosis for any long-term illness, especially any future medical treatment that will be costly and expensive.
- 22. A copy of your homeowner’s insurance policy.
- 23. Documentation showing balances owed for any and all secured debts and documentation as to the amount of the monthly payment for each of those debts.
- 24. If you are self-employed provide a detailed breakdown of your monthly business expenses and the documentation (receipts, invoices, canceled checks) to prove those expenses for the past three months.