Do you owe the IRS significant amounts for back taxes, are subject to wage garnishments or bank levies? Depending upon your financial situation, you may be a candidate for an offer-in-compromise (OIC). An OIC is an IRS program where, if the taxpayer meets certain IRS financial standards, the IRS will accept less money than the full amount due the IRS as a compromise.
According to Scott Reisher, Director, Collection Policy of the IRS Small Business/Self-Employed Division, the IRS is accepting more OICs from taxpayers who cannot pay the full amount of their back taxes. The IRS accepted 27% of OICs made in 2010 and 34% of the OICs made in 2011. Reisher, speaking on a webcast for the American Bar Association Section of Taxation, stated that most OIC cases are resolved within nine months.
While the percentage of OICs accepted by the IRS is statistically known, what is not known are the statistics behind the reasons that the OICs were rejected. There are several reasons why OICs are rejected. Taxpayers must be currently compliant. That means that the tax returns for the most recent tax year have been filed before the due date (extensions are allowed) and the taxpayer must be making estimated tax payments for the current year or have sufficient withholdings from W-2 wages to avoid a current year tax liability. In other words, if the IRS is going to consider taking less money for prior years’ tax assessments, the taxpayer must be current with its current year’s taxes due. Another possible reason why OICs are rejected is that they are prepared by the taxpayer and are incomplete. There is much financial information that must be submitted with an OIC and that information must be submitted in accordance with IRS rules and regulations. Many taxpayers find the completion of the various IRS forms to be onerous. Another contributing factor to the large percentage of OICs that are rejected may be related to the flood of OICs that were submitted by unscrupulous tax resolution companies who filed OICs when the taxpayer complained to the State Attorney General. These firms had received fees from the taxpayer but failed to submit any filings with the IRS until investigations about their practices were initiated by a defrauded consumer. And of course, the IRS will reject OICs where the taxpayer has the ability to repay the IRS tax debt in full.
While taxpayer’s may have monthly expenses that exceed their income, the IRS analyzes the taxpayer’s income and makes a determination as to the taxpayer’s allowable living expenses, based on collection financial local and national standards that are generally updated annually. Thus, while a taxpayer may be living beyond their means and have a negative cash flow, the IRS computation may show a positive cash flow using its standards and guidelines. The IRS also analyzes the taxpayer’s assets and liabilities. The Service will also consider the taxpayer’s age, earnings potential, the pending collections statute of limitations and other factors when considering an OIC.
An OIC is one viable option for taxpayers who owe the IRS money.
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