What to do about back taxes? Consider an Offer in Compromise (OIC). As a taxpayer or taxable entity, you and your business have a legal right to file an OIC for any liability related to unpaid taxes, and the IRS is obliged to review and consider every OIC.
The OIC program was created to expedite agreements between taxpayers and the IRS, when acceptance of the offer is in the best interest of both parties. Basically, if the government believes that you may never be capable of paying the full amount of your outstanding debt, or if there is any doubt as to whether or not you are actually liable for the debt, then the government can waive any and all of your tax debt.
Qualifying for an OIC Settlement
In order to qualify for an OIC settlement, you and your business need to meet at least one of the following three criteria:
- You can convince the IRS that your liability may have been incorrectly assessed.
- You can show the IRS that you are unlikely to be able to pay your tax debt in full.
- You can demonstrate that due to extenuating circumstances, your tax debt would “create an economic hardship, or would be unfair or inequitable.”
Submitting your offer is a formal process (we’re talking about the IRS, after all), and depending on the circumstances of your case, the application and review process can be time-consuming, convoluted, and frustrating.
To begin, submit a Form 656, along with the application fee. If you are offering to settle your debt in less than five months, then you must enclose a minimum payment of 20% of your offer along with the application. If you are going to need more than five months to settle your debt, then you must include your first payment installment, and you must continue to make scheduled payments while your offer is pending.
The payments establish good faith, and even if your offer is rejected, these payments will go toward reducing your overall debt.
Now the big question: How much should you offer? According to Uncle Sam, the amount of an OIC must be equal to the “realizable value” of your total assets, plus whatever amount of money the IRS could take from your future income—this number is known as the Reasonable Collection Potential, and it is the single most important factor determining the success or failure of your offer.
It is not always easy to calculate your Reasonable Collection Potential, but you can find help either on the IRS Form 433A Worksheet, or by working with a professional tax preparer.
In the end, if your offer is accepted, you will pay less than you actually owe. Good luck!