The actual truth about the “Pennies on the dollar” Offer in Compromise is somewhere in the middle.
While it is true some taxpayers can negotiate their tax debt by paying only pennies on the dollar with the offer in compromise program, the IRS has a very strict set of rules and a small percentage of taxpayers will actually qualify for the OIC program.
To help understand the Internal Revenue’s reasoning and motivation behind the OIC program it’s important to remember the IRS is not allowing a negotiated settlement because they want to be nice. The IRS is accepting debt settlement offers for less than the amount owed because they feel they will either they will get their money faster, or that they would not otherwise be able to collect any funds at all.
To qualify for an Offer in Compromise the taxpayer (or their tax attorney) must show either of the following:
Doubt of Collectability
– Doubt of collectability means the amount of tax liability is correct but the taxpayer will be unable to ever pay the full amount owed. There can be many reasons for this including the age and health status of the taxpayer.
Doubt of Liability
– Doubt of liability is more simple – the taxpayer must show they do not owe the IRS the amount the IRS has assessed.
If a taxpayer cannot meet either of these requirements, they should consult a tax attorney; other programs exist which they may qualify for the resolve their back tax debt.
Once a taxpayer has been shown to qualify for an offer in compromise they must negotiate the amount owed – this amount must be an offer the IRS is willing to accept, and again the IRS has strict rules to determine this amount.
In general, the amount owed will vary on speed the taxpayer is able to repay the debt. The faster the repayment, the lower the amount will be. For the smaller but longer payment option, IRS will total all of the taxpayer’s financial assets, income potential during the time allowed before the statute of limitations expires and the amount of money the taxpayer’s items would generate at a quick sale auction. As you can see it may be a contentious process to determine the amount of potential income, because of this it very highly recommended you retain a tax attorney who is experienced with an offer in compromise. Obviously the small the amount of potential income, the smaller the final tax debt settlement amount will be.
After the taxpayer and IRS have agreed on the amount the taxpayer will owe, the next step will be in deciding how it will be paid. The Offer in Compromise has three different payment options available.
The Cash Offer
– The cash is paid in five monthly installments. It is based upon your monthly disposable income times 48 plus your assets. It does not matter how much you owe the IRS, you still will only pay the above amount because it is based upon your ability to pay.
The Short Term Deferred Offer
– The short term deferred offer is paid in 24 monthly installments. This offer is based upon your monthly disposable income times 60 plus your assets divided by 24.
The Long Term Deferred Offer
– The long term deferred offer is based upon the amount of time left on your collection statute of limitations. Basically, it is your monthly disposable income times the months remaining on your statute of limitations.
It should be noted that even a successful Offer in Compromise is not without its risks. Once a taxpayer has a settlement agreement it is crucial they make their payments on time. Even one late payment can nullify the whole agreement and the taxpayer will once again be liable for the total amount owed.
While it is true many taxpayers have qualified and settled for greatly reduced tax debts, as you can see it is no simple matter to qualify and agree on a settlement amount. If you are suffering from a large tax debt burden and receiving notices from the IRS contact a qualified tax attorney immediately to discuss your options. The longer you go without responding to the IRS the larger your IRS problems will become.
ABOUT THE AUTHOR: Attorney Mary E. King
Mary E. King is an IRS Tax Attorney with the Law Office of Mary E. King, P.L. in downtown Sarasota. She practices in the areas of IRS Problem Solving, Mortgage Foreclosure Defense, Estate Planning and Probate. As a dedicated IRS Tax attorney Mary has been helping clients get tax debt relief by negotiating currently non-collectible status, offers in compromise, installment agreements, innocent spouse cases, audits, removing levies, releasing liens, and negotiating penalty abatement.
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