If you owe more in tax debt than you can realistically repay, you should talk to a tax attorney about negotiating an offer in compromise (OIC) with the IRS. An OIC allows you to settle your tax debt for less than the full amount. Getting one approved, however, can be something of a challenge.
In order to qualify for an OIC, you must have 1) filed all of your tax returns; 2) received a bill for at least one tax debt; 3) made this year’s estimated tax payments; and, 4) if you’re a business owner with employees, made this quarter’s required federal tax deposits.
Beyond that, you can attempt to negotiate an OIC if you can demonstrate one of these three things:
- You can’t pay the full amount in taxes owed without significant financial difficulty
- You don’t actually owe the tax you’re being billed for
- There is another good reason why an OIC would be in both your best interest and that of the IRS
According to a former Department of Treasury revenue officer writing for Accounting Today, the acceptance rate for OIC proposals was about 41% in 2018. That year, the IRS accepted 24,000 offers, which together made up about $261.3 million. However, it also rejected 34,000 OIC proposals.
The difference between an acceptance and a denial could be due to overall policy or tied to the individual details of your case. For example, the former revenue officer says that the IRS is most likely to accept your offer if you offer to pay the maximum collectible amount. That is, you’re offering to pay most of what the IRS would be able to get if it entered into collections with you.
You will report information about many factors on a Form 433-A (433-B for businesses) that lay out your financial hardship. This includes your income, your expenses, your assets, your age, your education and your lifestyle. These items, in combination with the Collection Statute Expiration Date will give the IRS a good idea of whether the hardship you claim is real. Expect the IRS to investigate your claims.
A word of caution: If your lifestyle exceeds a certain level, the IRS is likely to determine you do not suffer from significant financial hardship. If you do have the means to pay your taxes but need additional time, you may instead need to negotiate a repayment plan instead of an OIC.
Whether you qualify for an OIC or need another way to pay down your back taxes, working with a tax lawyer may increase your chances of having your plan approved by the IRS.