If you have been given a substantial tax bill following an audit, you might not have the means to pay it. Bills from the IRS will include back taxes, interest, and any penalties they’ve determined you qualify for. If you don’t pay the taxes, you could be subject to additional legal trouble. So what are you supposed to do?
One of the most commonly used solutions is the Offer in Compromise program that the IRS has. This allows you to settle your outstanding debt with the IRS by paying a lump sum up front. Once you do this, you will have solved your tax obligation, and you won’t be liable for any more fees or penalties going forward.
Offers in Compromise have been part of the tax code for more than half a century. In the past, there were strict rules and regulations regarding who could qualify for this program. But as time has gone on, the IRS has started to relax their guidelines on who qualifies. They are more concerned with making sure they get paid in a cost-efficient manner than in wringing every last penny out of someone who can’t pay it.
With that said, an OIC isn’t simple to come by. If you have any financial means to pay your taxes whatsoever, you can’t expect to get a break. You can talk to your tax attorney about your options to ask for an offer in compromise or another payment plan. They will be able to advise you on the best course of action based on your current finances and owed taxes.
It is possible to get an OIC even if you aren’t technically in dire financial straits. But doing so requires the work of an extremely skilled professional.
Every offer in compromise is different depending on the case. First, the IRS will take into account how much you owe in both taxes and additional fees. Then they’ll take into account your assets, any existing liabilities, your income, and what your prospects are for income in the future.
There are guidelines that state that if you can’t pay a lump sum up front, you may also pay the agreed-upon amount over a predetermined period of time lasting a maximum of two years. If you do this, though, you will end up paying significantly more than if you just took the lump sum right away. So it’s only a good option for people who truly can’t pay everything at once.
If the IRS believes that you will be able to pay all of your penalties, fees, and back taxes during the remaining collection period, they won’t accept an OIC. Instead, they will use all of the tools at their disposal to collect every cent from you before the statute of limitations runs out.
Strangely enough, this means that you’re less likely to receive an OIC if you only owe a small amount. Instead, people who owe large amounts of taxes are more likely to receive the offer. That’s because the IRS doesn’t want to waste time and expensive resources on legal proceedings and collections from someone who won’t even end up paying their full bill. It’s more efficient to simply forgive a portion of the excess taxes.
Offers in compromise are not a quick fix to your tax problems. Negotiating with the IRS might take at least six months. In some cases, particularly complex or hard-fought ones, the process might take more than a year before finally reaching a settlement. When the IRS doesn’t offer a rejection or acceptance in two years, the compromise will be considered accepted.
While you have an OIC pending, you don’t have to pay your back taxes. You will need to pay your current taxes, though. This might include federal payroll taxes and quarterly income taxes. Failing to pay your current taxes will result in an immediate rejection of your OIC. On top of this, you won’t have any right to appeal the decision.
When you file for an OIC, you also need to submit a deposit. Your original filing will make an offer for the lump sum that you can pay. Your attorney will help you calculate an amount that’s reasonable for you to pay while still being likely to be accepted by the IRS. The filing deposit must be 20 percent of your lump sum offering.
If you choose the periodic payment plan, your first installment must be paid in full when you file. While the payment plan is in the evaluation process, you have to continue paying your installments at the appropriate due dates. If there is a withdrawal, return, or rejection of the OIC, your deposits will be kept by the IRS and applied to your tax burden.
You’ll also need to pay a basic filing fee of around 200 dollars.
If you do have an OIC accepted by the IRS, you have to pay all of your current taxes as soon as they’re due. That includes quarterly payments. If you fail to do this in the first five years after the acceptance, the IRS will immediately void the OIC and collect your tax penalty in full.