Offer in Compromise

What is an Offer in Compromise?

The Offer in Compromise program lets qualifying taxpayers pay off their accrued tax debt for less than what is owed. The IRS receives partial payment, and the taxpayer wipes their tax debt clean for a fresh start. Qualifying taxpayers may also be able to get an offer in compromise on their New York taxes through the NYS Department of Taxation and Finance.

As you may imagine, getting an Offer in Compromise approved can be fairly time-consuming, as the IRS wants to get everything it possibly can from taxpayers. Working with a tax attorney with experience in Offer in Compromise filings can help take this burden off of you and improve your chances of success.

How an Offer in Compromise Works

You’ll begin by making sure you qualify. This means you must have filed all required tax returns, made required estimated tax payments if applicable, and not be in the process of filing bankruptcy. Then, the process continues with filling out the OIC paperwork, which is found in the Form 656 Booklet provided by the IRS. 

Once the IRS receives your paperwork, they will process it and assess whether or not your offer is a fair representation of what you can pay. In general, you won’t qualify for an Offer in Compromise if you are able to pay your tax debt in full via other means. For example, if you could reasonably make monthly payments and pay your debt in full within 72 months, your offer will likely not be considered. Additionally, if you have significant equity in your assets, the IRS would expect you to use that equity to cover your tax debt before they would accept an Offer in Compromise.

If the IRS accepts your offer, you either pay what you offered in full or make the periodic payments you proposed in your offer for up to 24 months. If they decline your offer, you are still expected to explore different payment arrangements to address your debt.

Reasons to Request an Offer in Compromise

There are three primary reasons the IRS will consider an Offer in Compromise. Most people apply because there is doubt as to collectability, but a tax attorney in New York can help you figure out if other options are relevant to your situation.

Doubt as to Collectability – The IRS may accept that there is doubt to collectability if it’s unlikely they’ll be able to collect the full amount due. They determine this by taking an extensive look at your income and assets, as well as how much time they still have in which they are allowed to pursue collection.

Doubt as to Liability – The IRS may accept a partial payment of what you owe if you have reason to believe that you do not owe the taxes they claim or if you believe the amount is incorrect. You’ll need to show that you have a legitimate reason for this belief to have your offer accepted.

Equitable Tax Administration – This option may be suitable for cases in which a taxpayer can pay the balance due, but the IRS forcing them to do so would create significant economic hardship or be inequitable.

Pre-Qualifier Tool

The Pre-Qualifier tool provided by the IRS is completely optional. You do not have to run your numbers through this tool before you apply, but doing so may be helpful if you’re unsure about what the IRS looks at during its evaluation of your offer. Note, though, that if you use this, it does not use all of the information the IRS uses, so it may not be entirely accurate. 

Applying for an Offer in Compromise

When you decide that an Offer in Compromise may be the best option for you, you can start looking into the application process and gathering the necessary documentation. The Form 656 Booklet provided by the IRS includes all of the forms you need to apply for an Offer in Compromise. Form 433-A is for individuals who are requesting an Offer in Compromise, and Form 433-B is for businesses requesting a settlement. You will also need to fill out Form 656.

These forms are several pages each, and you’ll need to provide supporting documentation in addition to the forms themselves. 

Form 433-A

The individual OIC form, Form 433-A, requests the following information to assess whether or not your offer is acceptable:

• Your employment information
• Information for everyone else in your household and whether or not they contribute financially
• Detailed information on your personal assets, including cash and investments, your real property, vehicles, and any other assets you may have, such as artwork, jewelry, and interest in businesses
• Your monthly household income and expenses breakdown
• Information on your self-employment, if applicable
• Business assets for self-employed individuals
• Business income and expenses for self-employed individuals

Upon filling out this detailed information, the form includes a basic calculation for figuring out your minimum offer amount. The IRS essentially looks at the monthly income you have remaining after you account for your total household expenses and then figures out how much you are able to pay. If you are planning on paying your offer over time, rather than in a lump sum, the calculation will be higher.

Finally, you’ll need to provide information regarding any legal action you are party to and whether or not you are the trustee, fiduciary, or contributor of a trust. The IRS also asks if you own any foreign assets or if you have sold any assets for below market value in the previous decade.

At the end of Form 433-A, you’ll find a list of supporting documentation you need to provide with your completed application. This list includes:

• Copies of your most recent paystubs and earning statements
• Copies of your most recent statements for each retirement and investment account
• Copies of your most recent statements from every other source of income
• Three months’ worth of bank statements
• Copies of lender statements for mortgages, second mortgages, and vehicle loans
• If applicable, a list of Accounts Receivable
• Proof of delinquent state and local tax liability
• Court orders for child support and alimony payments if those payments are claimed in your monthly expense section
• Trust documents if applicable
• Form 2848 if you would like an attorney, CPA, or enrolled agent to represent you

Form 433-B

Form 433-B, which is utilized for businesses, is equally detailed. Plan on providing information for all business assets, income for all officers and owners, and business expenses. From there, you’ll calculate your minimum offer. The list of documents you need for a business Offer in Compromise is shorter, but still fairly comprehensive:

• Current Profit and Loss statement covering a period of at least six to 12 months
• Copies of your most recent six bank statements for every business account
• Copies of the three most recent statements for each investment account
• Copies of statements for outstanding accounts
• Copies of statements for any assets used as collateral on a loan
• Form 2848 if you would like the IRS to discuss your case with an attorney, CPA, or enrolled agent you’ve hired

Form 656

Form 656 is the final form needed for your Offer in Compromise request. You’ll need to break down the different types of taxes you owe. If you’re an individual, this is likely just the amounts from your individual tax returns. Businesses will also need to list anything owed for a trust fund recovery penalty, quarterly tax return, or annual unemployment tax return.

The next part of the form is for those who wish to seek low-income certification. The non-refundable application fee for an Offer in Compromise is $205, but you can get that waived if you are considered low-income. To figure out if you are low-income or not, you take the size of your family unit and look at the amount listed for your location. If your annual household income is below that number, you are likely considered low-income.

This is beneficial in another way; when applying for an Offer in Compromise, you must make an initial payment with your application. The initial payment is 20% of your total offer if you are offering a lump sum payment or one monthly payment if you plan on paying over six to 24 months. If your offer is rejected, that payment is not returned to you. It is put toward your tax debt. If you are considered low-income, you do not need to make this initial payment.

As you move down the form, you’ll mark the reason for your offer, your total offer amount and initial payment, and if you have made any payments via the Electronic Federal Tax Payment System. The IRS does require you to disclose where you will get the money needed to pay your offer. You’ll include separate checks for the application fee and the initial down payment. Finally, the IRS requires you to mark that you meet the basic requirements for an Offer in Compromise—that you have made all required estimated tax payments and that you have filed all required tax returns.

After reading through the legal terms and requirements, you can sign the form and send it in with your other required forms and payments.

At the very bottom of the Form 656 Booklet, you can find an application checklist that can help you verify you have included all necessary forms and documentation.

What Happens If Your Offer is Rejected?

The IRS will notify you if your offer is accepted or rejected. If it’s rejected, you have 30 days to file Form 13711, Request for Appeal of Offer in Compromise. Not every situation warrants an appeal; for example, if your offer is dramatically lower than what the IRS calculated and you have no valid reason for such a low offer, an appeal is unlikely to lead to a different decision. 

You can look at the Income/Expense and Asset/Equity Tables provided by the IRS with your rejection letter to see if there’s a significant disparity that needs to be addressed.

In general, it’s recommended that you work with an IRS Offer in Compromise attorney, due to the complexity of this process and the massive amount of documentation required. But if you have to appeal a rejection, it is even more important to consult a tax professional who can help you decide your next steps.

How to Manage Your New York State Taxes With an Offer in Compromise

The IRS Offer in Compromise program only addresses your federal tax debt. If you also have New York State tax debt, you’ll need to look into the Offer in Compromise program offered through the NYS Department of Taxation and Finance. The state program is fairly similar to the IRS program, but it is open to those who are insolvent or who have debt discharged in bankruptcy. They also consider offers from those who are not insolvent but for whom full payment would lead to undue economic hardship.

Note that the state’s definition of “undue economic hardship” refers to an inability to pay basic living expenses, such as rent or mortgage, food, utilities, and other unavoidable expenses. It does not refer to luxury expenses, such as private school tuition, expensive extracurricular activities, or charitable contributions.

You can either apply online or by submitting Form DTF-4 or DTF-4.1 via mail. After processing your application, they will notify you whether it is accepted or rejected.

Contact McLaud Law Today

The Offer in Compromise process can be overwhelming due to the amount of documentation and paperwork required by the IRS. Having a tax attorney on your side means getting the benefit of their expertise to improve your Offer in Compromise and negotiate with the IRS if they do not accept your initial offer. Negotiating with the IRS is not like negotiating in the business world, because IRS agents have strict procedures they must follow. An experienced tax attorney knows their procedures and how to position your application for the best chance of success. With the help of the team of tax professionals at McLaud Law P.C., you can get in-depth advice on your tax situation, develop a plan to get caught up and compliant, and finally get the peace of mind you deserve. Call us at 585-397-7785 or reach out online to set up a consultation today.

This communication is Attorney Advertising. It is presented for informational purposes only and does not constitute legal advice. Every legal situation is different, and prior results do not guarantee a similar outcome. This communication does not create an attorney-client relationship between McLaud Law P.C. and the recipient.