Advertisements all over the media make claims about settling tax debts that taxpayers must pay to the IRS. The particular settlement program is known as Offer In Compromise. However, the fact that a vast majority of Offer in Compromise applications are rejected is something you should be aware of.
In a report by the Government Accountability Office, 16 million people had tax debts as of 2010. During that time, only 31,000 Offer in Compromise applications were approved, while approved Installment Agreements numbered 4 million.
The Offer in Compromise acceptance rate is low for two reasons.
- There are a lot of taxpayers who apply but do not fulfill the base qualifications for Offer In Compromise.
- The taxpayers who do qualify are unable to pay the amount they offer.
Do You Qualify for an Offer in Compromise?
The IRS uses the ability of the taxpayer to pay their tax debt as the basic criteria for determining the acceptance of an application for an Offer in Compromise. The IRS website has a tool called the OIC Pre-Qualifier that can help you understand your acceptance eligibility.
To qualify for an OIC, a client must prove their inability to pay the total tax debt before the expiration of the collection statute. This is done by viewing the net equity of assets and any future income. The IRS uses monthly disposable income to calculate future income to determine whether a tax debt can be paid before the expiration of the collection statute.
If the final calculation determines your inability to pay your tax debt, you are eligible for an Offer in Compromise.
You should know that eligibility does not equal acceptance. You must be able to pay the offer amount computed by the IRS for your application of Offer in Compromise to be accepted and the debt to be settled.
Can You Pay the Offer in a Compromise Amount?
A formula objectively determines whether you can pay the amount proposed in the Offer In Compromise. The formula requires estimating your future income for 1-2 years.
Due diligence is necessary for calculating the offer amount. Sometimes, people with a tax debt overestimate or underestimate this amount. They need to calculate their monthly disposable income and the net equity in their assets properly. Due diligence is also important to avoid what may become a lengthy and costly investigation process.
2011 Fresh Start Initiative by the IRS
The number of qualifications and acceptance of Offer In Compromise has been rising since 2011. The reason is the Fresh Start Initiative, which has made qualifying for Offer in Compromise easier. The 2011 initiative also enabled the people who owe taxes to pay a lesser offer amount.
Before the introduction of the initiative, offer amounts for tax debt settlement were considerably higher than they are today. Future income would be summed up for four years instead of the 1-2 years that have been calculated since the Fresh Start Initiative.
Applications for Offer in Compromise increased by 30% after Fresh Start was introduced, while the IRS’ acceptance rate increased from 25% to 42%.
Conclusion
The Offer in Compromise should only be considered when your financial situation is poor enough to hinder your ability to pay the complete tax debt until the expiration of the collection statute. The criteria for qualification and acceptance of an Offer in Compromise application are quite clear in deciding between pursuing an Offer in Compromise.
The difficult task is the calculations and estimations involved in computing the ability to pay and the net equity in assets. It would help if you looked closely into the feasibility of the Offer in Compromise regarding your financial situation. Sometimes, suitable alternatives to Offers in Compromise exist, such as a Partial Pay Installment Agreement or a Currently Non-Collectible Status.
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