If you’ve found yourself in a situation where you are looking to settle tax debt with the IRS, you likely have a few questions like, is that even a possibility? Let’s dive in.
What to Know About the IRS Settling Tax Debt At-a-Glance
First and foremost, it’s important to know that not everybody can take advantage of an Offer in Compromise with the IRS and certain criteria must be met in order to even be considered.
In general, the IRS won’t accept a settlement offer if the taxpayer can afford to pay what is owed. There are other options available for taxpayers struggling to pay their tax bills, like payment plans.
A taxpayer is required to file all required tax returns before the IRS will consider a settlement offer. When applying for a settlement, taxpayers may need to make an initial payment.
The IRS has an Offer in Compromise Pre-Qualifier tool for taxpayers to find out whether they meet the basic requirements to qualify. The tool also provides an estimate of an acceptable offer amount.
If you are interested in filing for an Offer in Compromise, you should visit the IRS’s OIC page for detailed instructions and a list of the required forms.
How Much will the IRS Settle For?
Though rare, the IRS does, in fact, have the authority to write off all or a portion of your tax debt and settle with you. This is known as an offer in compromise, or OIC.
OICs are pretty rare. In fact, though there are more than 16 million taxpayers who owe the IRS, in 2017, just 25,000 got an OIC. In most cases, you are better off requesting other IRS options like a payment plan or changing your status to “currently not collectible”— where your allowable expenses surpass your monthly income.
How to Prove You’re Eligible for an OIC
First of all, you must prove to the IRS that you can’t pay in order to be eligible for an OIC. This is known as “doubt as to collectability,” which in layman’s terms means that you owe the IRS, but you don’t have the money to pay them. So, you must prove to the IRS that they can’t collect all taxes you owe before they’re due. This deadline is known as the collection statute expiration date. The deadline is usually ten years after the IRS charges you the taxes.
Essentially, this means that your net equity in your assets, including your 401(k(, savings, investments, and your home, plus your monthly disposable income (average monthly income minus allowable monthly living expenses) is less than the amount of taxes you owe.
The IRS will use assets and monthly disposable income to determine your net equity. There are specific rules they use to value your assets and determine what living expenses are permitted.
OICs are Complex
Even if you qualify for an OIC, you still must be able to pay the amount needed to settle your tax bill. This is known as the “offer amount,” and the amount will largely depend on your assets’ value. People who have built up equity in their home or 401 (k) may be required to pay their “net equity” in these types of assets to the IRS included as part of their offer.
The offer also includes what the IRS will get each month from you over a certain period of time. The determined amount of time will depend on many factors like how long the IRS has to collect and the method of payment you use to pay the offer amount.
For most people, a payment plan or hardship status is likely a better option.
Evaluating the OIC for Your Situation
The IRS has an option available for you to evaluate the OIC. This option is known as the OIC Qualifier tool, and it does the basic qualification elements for an OIC, but it does not account for a lot of the nuances in calculating value in assets as well as average monthly income and expenses.
It’s very likely you will need to lean on a tax expert’s expertise and skills to help you determine your assets, income, liabilities, and expenses, and any other factors that will help determine whether you qualify. If you do, your tax professional can determine how much your offer should be and help you deal with the IRS as you request the OIC. The Tax Relief Professionals can also help you request the correct IRS payment agreement depending on your unique situation.