Let’s face it: these days, keeping up with school tuition, credit card bills, mortgage payments and taxes is getting more and more difficult. For some reason, it seems like the bills just keep coming. What happens when someone is not able to keep current with all their expenses, namely taxes? Fortunately, the IRS established a program called the ‘Offer in Compromise” program. An Offer in Compromise (“OIC”) is an agreement between the IRS and a taxpayer in which the taxpayer pays less than the full amount owed on their taxes. This program allows eligible taxpayers who are behind on their taxes to get a “Fresh Start.” For a taxpayer to be considered for this program they must make an offer based on a fair assessment of their ability to pay, based on their assets and liabilities as well as their future income potential. The first step to being considered for this program is to submit an application along with the required $186.00 fee. This fee can be waived if the taxpayer’s monthly income is below a certain threshold. Before an OIC can be filed, 1) all unfiled tax returns must be filed; 2) you must make all required estimated payments for the current year; and 3) you must make all required federal tax deposits if you are a business with employees. Someone who is in bankruptcy is not eligible to file an OIC—people who have a pending bankruptcy can have their tax debt resolved within the context of the bankruptcy proceeding. Generally an OIC will be rejected if you are able to pay your tax debt in full. If you are lucky enough to have an OIC accepted, you must be aware that the IRS will keep any future refunds that you are entitled to for tax periods extending through the calendar year that the IRS accepts your offer. For example, if you have an offer accepted in 2017 and you file your tax returns on April 15, 2018, which entitles you to a refund, the IRS will apply your refund towards your taxes and not apply it towards your offer.
It is important to keep in mind that penalties and interest will continue to accrue during the offer period. Once your offer is submitted, you must continue to file and pay all your required returns and estimated tax payments through the final decision on your OIC. If your OIC is accepted you must stay current with all your tax obligations through the fifth year after acceptance.
Generally, there are two payment options that you can choose from to pay an accepted OIC. The first is a lump sum payment which requires a 20 percent down payment and no more than five payments within five months after acceptance. The second option is periodic payments, which require the first payment to be made when the OIC is submitted and the remaining balance to be paid within six to 24 months. Should one choose this method they must make the proposed monthly payments during the period of time that the offer is being considered. Should you fail to make a payment under this option, the IRS will return your offer and decline to consider it. Whatever payments are made during the time that the offer is being considered will be applied to the tax debt (and not returned) should the OIC be rejected. Stay tuned for a future article on exactly how an OIC is submitted.
By Michael Samuel
Michael Samuel is an attorney handling tax-resolution matters on behalf of taxpayers requiring payment plans, Offers in Compromise, “currently not collectible” status, as well as other tax resolution matters. He can be reached at [email protected]