How to Qualify for an Offer in Compromise

Episode 49:  In this episode, Timalyn continues the discussion began in Episode 48.  Today, she’s explaining how to qualify for an offer in compromise.  She’ll also provide information regarding how to apply for it.

NOTE:  Click here to listen to Episode 48.

What Is the IRS Considering when You Apply for an Offer in Compromise?

Remember, the offer in compromise allows you to settle your tax debt for less than you actually owe.  The IRS doesn’t approve this option for every tax payer who applies.  The IRS provides a pre-qualifier tool to see help you see if you qualify. 

The IRS is considering 4 factors:

1. Your Ability to Pay
2. Your Income
3. Your Expenses
4. Your Assets

When it comes to your ability to pay the IRS also considers your age. Your medical condition and medical history also comes into play.  Do you have a disease or condition that might prevent you from working? This, along with your level of education all impact what the IRS considers to be your ability to pay.

The IRS will analyze your earned and passive income.  Earned income is produced as a result of an action or activity you perform or something you did to in the past. Passive income considers  investment income, dividend income, and interest income.

Your expenses can be subjective.  What you consider a necessary expense may not be allowed by the IRS. If this is the case  you may have to increase your initial offer.  Remember, the IRS provides national standards that are used to determine an individual’s ability to pay. 

In Episodes 38 and 39, Timalyn discussed using IRS Form 433-F.  This form helps to calculate your disposable income, for an installment agreement.  You’ll can use IRS Form 433-A (OIC) for the offer in compromise. 

Are You Eligible for an Offer in Compromise?

Before you pursue this route, you need to have all of your required tax year returns filed.  Timalyn comments that this commonly refers to the last 6 years of returns.  Employers must also have all of your IRS Form 941s filed.  These are the Employer’s Quarterly Federal Tax Return forms.  The same goes for your 940 FUTA (Employer’s Annual Federal Unemployment Tax Return).  You also need to be up-to-date on your required estimated payments (listen to Episode 21).

Additionally, you can’t be in an open bankruptcy proceeding.  If you’re applying for an offer in compromise for the current year, you need to have filed a tax extension, if it’s tax season. 

Timalyn stresses that you need to make sure you have all of the above completed and filed before you even begin the offer in compromise process.

Substantiation of Your Expenses

Along with the 433-A (OIC), you must provide all of the information necessary to substantiate your expenses.  This includes, mortgage information showing your required monthly payment amount and where you are on those payments.  If you are leasing (renting), you’ll need to supply a copy of the lease and proof of payments. 

Form 656-B

This is the booklet you’ll use in applying for your offer in compromise.  It includes important information about additional documents, including IRS Form 656 and the non-refundable $205 application fee.  Make sure you are using the most current version of these forms.

You’ll also need to include the initial payment for each Form 656 you are submitting.  It’s important that you have a separate check or money order for each one.  The application fee is also a separate check. 

Designate Your Payments

The application fee and the initial payment(s) will be applied to your tax debt.  Timalyn recommends designating payments to a specific tax year and tax debt.  It’s going to take several months (maybe 6-9), to find out if the IRS has accepted your offer in compromise. 

If they reject it, you won’t receive the money back, so at least you’ll know where it’s going.   

The IRS Can Still File a Lien Against You

It’s possible for the IRS to file a tax lien while they’re reviewing your offer.  In Episode 3, Timalyn explained what this is and how it might impact you. 

The IRS will suspend other tax debt collection efforts (including garnishing your wages, levying your bank account, etc.). 

What If the IRS Rejects Your Offer in Compromise?

If this happens, your assessment and collection period will be extended.  If you were hoping your CSED (Collection Statute Expiration Date) would lapse, that’s not going to happen.  They’ll add the time it took to process the offer. 

Make all required payments detailed in your offer during the time the IRS is processing (i.e. evaluating) your offer.  One option is the lump sum cash payment.  This is 20% of whatever amount you were offering.  The remaining balance due must be paid in 5 or fewer payments.  Again, be sure to make those payments while you’re waiting for a written response from the IRS.

The other payment option is to make periodic payments.  Basically, continue to pay the same amount as you sent for your initial payment, each following month.  If they accept your offer, simply continue paying your monthly installments until the tax debt is fully repaid.  You only have 24 months to pay the debt in full, using this option.  Those 24 months have to be before the CSED lapses.

A failure to make the required payments nullifies your offer, even if the IRS was going to accept it.   

Timalyn points out that during this process, you don’t have to make payments on an existing installment agreement. 

The 2-Year Automatic Acceptance

Your offer is automatically accepted if the IRS doesn’t make its decision in a period of 2 years, from the date they receive your offer and supporting documentation.  Timalyn strongly recommends you mail correspondence to the IRS using certified mail.  The post office will return a receipt with a specific date the IRS received the offer.  This is the date you use in determining your 2-year window.   

Remember, before you go down this road, it’s important that you determine if you even qualify for an offer in compromise.  Again, refer to the beginning of this episode during which specific forms were explained.

You should really consider working with an experienced tax professional who handles tax relief cases.  An offer in compromise is extremely complicated and isn’t something most people should do on their own.   

In addition to all of the filings, if the IRS actually accepts your offer, you MUST meet all of the offer terms listed in IRS Form 656, Section 7.  The IRS won’t release any existing tax liens, until your offer terms are satisfied. 

Need Tax Help Now?

If you need answers to your tax debt questions, book a consultation with Timalyn via her Bowens Tax Solutions website.  Click this link to book a call.

Please consider sharing this episode with your friends and family.  There are many people dealing with tax issues, and you may not know about it.  This information might be helpful to someone who really needs it.  After all, back taxes shouldn’t ruin their life either. 

As we conclude Episode 49, we encourage you to connect with Timalyn on social media. You’ll be able to subscribe to this podcast on Spotify, Apple Podcasts, Google Podcasts, and many other podcast platforms.  

Remember, Timalyn Bowens is America’s Favorite EA and she’s here to fill the tax literacy gap, one taxpayer at a time.  Thanks for listening to today’s episode. 

For more information about tax relief options, visit https://www.Bowenstaxsolutions.com/ .

If you have any feedback, or suggestions for an upcoming episode topic, please submit them here:  https://www.americasfavoriteea.com/contact.

 

Disclaimer:  This podcast is for informational and educational purposes only.  It provides a framework and possible solutions for solving your tax problems, but it is not legally binding.  Please consult your tax professional regarding your specific tax situation.