When you owe more in taxes than you can reasonably pay, it may feel like there’s no way out. However, some options can bring you relief, including the offer in compromise, a program that settles your tax debt for less than you owe. Rejection rates for the offer in compromise (OIC) program tend to be high, with fewer than 40% of applications getting accepted each year. Despite the odds, this is a suitable option for many taxpayers with tax bills they cannot reasonably expect to pay.
Wondering if you’re a good fit for the offer in compromise program? If you fit these signs, you may want to consider this tax relief option with the help of W Tax Group.
Key Takeaways
- An offer in compromise settles your tax debt for less than what you owe.
- But it’s usually only available to those who truly have no realistic way of paying off their entire tax bill.
- Consider an offer in compromise if you’ve unsuccessfully tried other tax payment options, have little to no disposable income, or owe an amount that far exceeds any equity you have in your assets.
- Consult with a tax professional who can help you submit the strongest offer in compromise application possible.
1. You Owe More Than You Can Afford to Pay
This is the foundation of the most successful offer in compromise applications. The ideal applicant isn’t someone who just wants to pay less; it’s someone who genuinely can’t afford to pay what they owe, even if their tax debt is spread out over 72 monthly payments.Â
To figure out whether or not you can afford your tax debt, the IRS looks at your RCP—your Reasonable Collection Potential. This is based on your monthly disposable income and the value of any assets you own. If your Reasonable Collection Potential is substantially lower than what you owe, you may be a good fit for this program.Â
For example, if you owe $40,000 in taxes but your RCP is $10,000, the IRS may prefer to take that $10,000 now, rather than spend years of time attempting to collect the full $40,000.
2. You Have Few or No Valuable Assets
The IRS will only accept an offer in compromise if you have no other way to pay your taxes. You may have no cash on hand and limited income, but if you’re sitting on $100,000 of equity in your home, the IRS will fully expect you to tap into that before they grant you OIC relief. But if you have no valuable assets that you could use to pay off your tax debt, the OIC program could be a good fit.
3. Your Income is Low or Unstable
For many people, the other main option for payment relief is an installment agreement. However, an installment agreement only works if you have steady income that allows you to make monthly payments.Â
If your income is so low that there’s no wiggle room for another monthly payment or your income fluctuates substantially from month to month, you may not qualify for an installment agreement. Even if you do qualify, it may not make sense to sign up for an installment agreement when the likelihood of a default is unreasonably high.
4. You Have Tried But Failed to Keep Up With Payments
You may have tried to pay off your debt with an installment agreement, only to fall behind on payments and ultimately default on it. This is more common than you may think; many taxpayers think that they can afford a monthly tax payment, only to realize that it’s outside their budget.Â
If you’ve attempted to pay off your tax debt via an installment agreement or payment plan and have failed, that may show that you’re attempting to pay off your tax debt in good faith. When a taxpayer shows they can’t afford to pay off their tax balance over time, the IRS tends to be more flexible with them because they’ve shown an honest effort to pay their tax debt.
5. You Are Up-to-Date With Filing Requirements
To even be considered for an offer in compromise, you must be up-to-date with all of your required tax returns. Returns for all prior years must have been filed, you must have made all estimated payments if you are required to do so, and you must be able to keep up with your taxes going forward. Even if you’re otherwise the perfect applicant for an offer in compromise, your offer will be rejected if you are behind on tax returns.
6. You Don’t Qualify for Other Relief Options
As part of the OIC assessment process, the IRS will typically look at whether a taxpayer qualifies for other relief options. Ideally, they’d like you to pay your taxes via an installment agreement that results in full payment. If you don’t qualify, that may help you in your efforts to secure an OIC. The IRS may also look at whether or not you’ve applied for other programs, such as currently not collectible status or partial payment installment agreements, to see if other routes may eventually allow you to pay more of your tax debt.
7. You’re Facing Serious Financial Hardship
The IRS often accepts OIC applications that show that payment in full would cause the payer financial hardship. Yes, they want to collect taxes in full, but they don’t want to do so in a way that leaves taxpayers unable to put food on the table or pay their rent or mortgage.
The effective tax administration route can also be useful here. We discussed earlier having $100,000 in home equity. However, imagine that if you sold your home and used $90,000 to pay off your tax debt, only to find that housing prices have increased so much that you couldn’t afford to buy or rent in your current area.Â
While you may technically have the equity needed to pay off your tax debt, the IRS may agree that requiring you to do so would be unjust because it would force you to choose between paying off your tax debt and being homeless.
8. You’re Willing to Comply Moving Forward
Tax compliance plays an important role in the OIC program. The IRS understands that people fall behind sometimes, but they do want to see that you can comply with tax requirements moving forward. Even if the IRS accepts your OIC, you still have work to do by making additional payments.Â
Falling behind on payments or not complying with other OIC requirements may result in your OIC being rescinded and the full amount being immediately due. Therefore, the IRS may look at past tax compliance outside of your current situation to determine if you’re likely to comply in the future.
9. You’ve Talked to a Tax Pro Who Thinks You’re a Good Fit
This is a bonus. If you fit the requirements above, it may be time to talk to a tax professional about whether or not the OIC program is a good route for you. If you’ve spoken to a tax attorney or other tax professional and they think it’s worth your time and effort to apply, that’s a very good sign that this could be the right form of tax relief for you.
Ready to find out if an offer in compromise could solve your current tax debt problems? The team at W Tax Group is here to help you gather the necessary information, provide the right documentation to the IRS, and navigate the application process. Let’s get started and get you on the path to tax freedom. Just call us at 877-500-4930 or reach out online to schedule a free tax relief consultation.
Sources:
https://www.irs.gov/payments/offer-in-compromise
https://www.irs.gov/businesses/small-businesses-self-employed/offer-in-compromise-faqs
https://www.irs.gov/taxtopics/tc204
https://www.irs.gov/newsroom/an-offer-in-compromise-could-help-taxpayers-resolve-tax-debt
https://irs.treasury.gov/oic_pre_qualifier/
