October 2022

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Nobody wants to carry the burden of owing taxes on their shoulders, but if you’re in that situation, a little-known IRS program called “Offer in Compromise” (OIC) may be the answer to your tax problem. OIC allows people to settle their tax debt for less than the total amount they owe. Sometimes it’s for significantly less, especially for low-income families. Continue reading to learn who qualifies and how it works.

What is an Offer in Compromise?

If a person owes money to the IRS, they may be able to offer the IRS a smaller, more affordable amount as a settlement. If the IRS accepts the OIC, the IRS will forgive the rest of the taxpayer’s debt. An Offer in Compromise tool allows qualified taxpayers to settle their federal tax debts.

Who Qualifies for an OIC?

The OIC isn’t open to everyone and there are strict eligibility requirements. Before you make an offer to the IRS, check your eligibility using the IRS “Offer in Compromise” pre-qualifier. And even if you qualify there is no guarantee that the IRS will accept your offer.

Generally, the IRS will consider an OIC for the following reasons:

• There is doubt whether the IRS correctly determined the amount you owe.
• You can’t pay the amount owed, meaning your assets and income are less than you owe.
• The debt is correct, and you can pay the debt in full, but doing so would cause undue economic hardship.

The IRS will look at your ability to pay, your income, your expenses, and your assets to determine whether you can pay and how much you may be able to pay. In general, the IRS only accepts offers equal to the maximum amount you’d be able to pay within a reasonable time.

Signs you’re a good candidate include:

• You are a retiree on a fixed income.
• You are in legal trouble with the IRS. They’re often looking to settle tax debt instead of getting bogged down in a lawsuit.
• You’re facing possible bankruptcy, but your primary problem is unpaid taxes.
• You can’t pay your full tax liability, or doing so creates a financial hardship.
• You meet federal low-income guidelines: under $51,950 for a family of three, under $73,550 for a family of five, and so on.

The IRS will decline offers if:

• You are in an open bankruptcy proceeding.
• You have not filed the required federal tax returns.
• You have not made the required estimated tax payments.
• You are self-employed, have employees, and have not submitted required federal tax deposits.

The Fresh Start Initiative

But there’s good news! The IRS expanded its Fresh Start Initiative in 2012, increasing acceptance rates. In addition, the initiative increased the threshold for placing a tax lien from $5,000 to $10,000, providing significant relief.

Submitting an Offer

You must complete several forms and provide other required information when you submit an offer. In most cases, you must also include an application fee and the first payment of your offer.

If you offer to pay a lump sum, your initial payment should be 20% of the total offer amount. If you receive written notice that your offer has been accepted, you must pay off the remaining balance in five or fewer payments.

If you offer to pay using a payment plan, your first payment should be the monthly amount suggested in your plan. You will continue to make this payment once a month until you receive notice from the IRS. If your offer has been accepted, continue making the monthly payments until your balance is paid in full, taking no more than 24 months after the offer is accepted.

However, you do not have to pay the application fee or initial down payment if you meet the Low-Income Certification guidelines, which depend on the size of your family, your household’s monthly income, and where you live. For example, the IRS will waive your initial fees if your family includes three people and your household income is less than or equal to $3,997 per month.

Possible Reasons an OIC Might Be Rejected

There are several reasons the IRS may not accept your offer, including:

• The offer is too low, and the government believes it can get paid in full from your future earnings — in which case the IRS will tell you what it thinks you can pay.
• You didn’t provide enough information to substantiate your financial condition.
• You’re a poor risk because you failed to make tax payments for the current year.
• You’ve been convicted of a serious crime.

Options if Your Offer is Rejected

It’s not unusual for the IRS to reject an OIC. Fortunately, there are two ways to respond. One is to resubmit an offer. If you submit your second offer less than a month from your first offer, you won’t need to complete Form 656 again. Instead, you just need to submit a letter stating the increase you’re offering. However, if you wait longer or your new offer is significantly different, you must complete and submit a new Form 656.

You can also appeal the rejection, which requires you to complete and file Form 13711 within 30 days of the IRS rejection letter. In addition, you must identify what parts of the rejection you’re disputing and state your reasons.

Beware of Advertisements that Claim They Can Help

Before you entrust your situation to any organization, check them out with the Better  Business Bureau and ask for references. While there are many reputable tax resolution firms, sadly, there are also many scammers and unscrupulous people who claim they can give you a fresh start — code for OIC.

CWF Can Help!

If you’re a working family or an individual in Philadelphia, Montgomery County, or Southern New Jersey earning less than $65,000 per year, you can get free professional help from Campaign for Working Families (CWF). If you owe back taxes and think you might qualify for an OIC, talk with an IRS-certified staff. They will help you through the process and ensure you complete the required forms. We will be by your side every step of the way!

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