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Frustrated old man in white. Taxes, debts and other problems.
Settling tax debt isn’t easy; you need somewhere to begin. Agencies explain how complicated the process is and recommend that you should not start without consulting a professional. Although, deciding between an agreement for installment or an offer in compromise isn’t as hard as it may seem. Taxpayers can usually decide what works best for them after learning the details of both processes. Each process has its own pros and cons.

Offer in Compromise

Advantages

One of the main reasons people choose Offer in Compromise as a settlement option is completion of their tax liability. Once the offer is accepted by the IRS and payment is made in full, the entire tax debt is paid. There is no hassle of keeping up with monthly installments.

If your tax debt is secured through the IRS with a lien on a property you own, the Offer in Compromise is able to clear that up. All you need to do is file a lien withdrawal. This may be a very strong reason to pursue an Offer In Compromise. However, the importance of this reason varies from individual to individual, depending on their financial situation.

Even if your Offer in Compromise is rejected, you can still pursue an installment agreement. In the case that the IRS accepts your Offer in Compromise, you would have to pay less than your total debt, which might seem attractive to some people.

Disadvantages

Rejection is the main reason why Offer in Compromise isn’t seen as a dependable option. Many times, the IRS rejects applications because of the financials of the applying individual. Several applications are turned down because a lot of tax relief agencies send applications even if they know they have zero chance of being accepted.

Liquidation of Assets

The IRS might expect you to liquidate your assets in order to come close to the amount that you owe. They can also file a federal tax lien against your property while the status of your Offer In Compromise is still pending. If you already have liens, it might not be a big issue. It also isn’t very common, but can be a possibility. 

Installment Agreement

Advantages

The benefits of Installment Agreements usually come in where the disadvantages of Offer in Compromise end. The first big advantage of an Installment Agreement is, usually, not having to liquidate your assets. Plus, the monthly installments in this plan can be extremely low. The total amount you end up paying can even be lower than what you owe currently, as debt that ages to more than ten years becomes uncollectible. You can check out the particular dates for the Collection Statute Expiration.

Another advantage of an Installment Agreement is the acceptance rate. It is much easier to get a Partial Pay Installment Agreement accepted than it is to get an accepted Offer in Compromise.

Disadvantages

In the Partial Pay Installment Agreement, the IRS gets the right to review your financial situation every 24 months. Acquisition of new assets and boosts in income can lead to the IRS increasing your monthly payments.

The second disadvantage of the Partial Pay Installment Agreement is the presence of tax liens. The IRS won’t lift those liens as they do in the Offer in Compromise. Moreover, the existence of liens can affect your ability to obtain loans.

Filing Process

The forms to file an Offer In Compromise and Partial Pay Installment Agreement are different, however the required information is pretty much the same. The IRS will require full disclosure of income, assets, and expenses in each of the methods for tax debt settlement. However, in the Offer in Compromise, there is only a one-time disclosure compared to the Partial Pay Installment Agreement, where disclosure is scheduled every two years.

Conclusion

The IRS prefers that people with tax debt apply for a Partial Pay Installment Agreement rather than an Offer in Compromise. The reason for this is the ability of the IRS to collect more of the tax debt because they expect the person to be in a better financial situation in the future. The recommended route is to consult a professional bookkeeper or CPA about your current financial status. Try to file for an Offer In Compromise if the professional recommends it. If you don’t file an Offer in Compromise or if it is rejected, you can file for a Partial Pay Installment Agreement.

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About Complete Controller® – America’s Bookkeeping Experts Complete Controller is the Nation’s Leader in virtual accounting, providing services to businesses and households alike. Utilizing Complete Controller’s technology, clients gain access to a cloud-hosted desktop where their entire team and tax accountant may access the QuickBooks file and critical financial documents in an efficient and secure environment. Complete Controller’s team of  US based accounting professionals are certified QuickBooksTMProAdvisor’s providing bookkeeping and controller services including training, full or partial-service bookkeeping, cash-flow management, budgeting and forecasting, vendor and receivables management, process and controls advisement, and customized reporting. Offering flat rate pricing, Complete Controller is the most cost effective expert accounting solution for business, family office, trusts, and households of any size or complexity.

 

 

Offer in Compromise - Complete Controller

There are advertisements all over media that make claims about the settlement of tax debts that taxpayers need to 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 that you should be made aware of.

In a report made by the Government Accountability Office, there were 16 million people with tax debts as of 2010. Only 31,000 Offer in Compromise applications were approved during that time, while approved Installment Agreements reached 4 million. Check out America's Best Bookkeepers

The acceptance rate for Offer in Compromise is low because of two main reasons.

  1. Many taxpayers apply but do not fulfill the base qualifications for Offer In Compromise.
  2. The taxpayers who do qualify are unable to pay the amount they offer.

Do you Qualify for Offer in Compromise?

The IRS’s essential criteria to determine the acceptance of an application for Offer in Compromise is the taxpayer’s ability to pay their tax debt. There is a tool on the IRS website known as the OIC Pre-Qualifier that can help you get a basic idea of your acceptance eligibility.

The basic idea to qualify for an OIC is for a client to prove their inability to pay the total tax debt before the collection statute expiration. This is done by viewing the net equity of assets along with any future income. Monthly disposable income is basically what the IRS uses to calculate future income to determine whether a tax debt can be paid before the collection statute expiration. Check out America's Best Bookkeepers

If the final calculation determines the inability to pay your tax debt, you are considered eligible for 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 Compromise Amount?

There is a formula used to objectively determine whether you can pay the amount proposed in the Offer In Compromise. The procedure requires an estimate of your future income for 1-2 years.

Due diligence is necessary for calculations of the offer amount. Sometimes, people who have a tax debt overestimate or underestimate this amount in their calculations. They need to correctly calculate their disposable income for each month and the net equity in their assets. Due diligence is also essential 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 being the Fresh Start Initiative, which has made it easier to qualify for Offer in Compromise. The 2011 initiative also enabled the people who owe taxes to pay a lesser offer amount. Check out America's Best Bookkeepers

Before introducing the initiative, offer amounts for tax debt settlement were considerably higher than they are today. Before the initiative, future income would be summed up for four years instead of the 1-2 years that is now calculated since the Fresh Start Initiative.

There was a 30% increase in applications for Offer in Compromise after the introduction of Fresh Start, while the IRS’ acceptance rate has 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 total tax debt until the collection statute expiration. The criteria for qualification and acceptance of an Offer in Compromise application is quite evident to decide between pursuing an Offer in Compromise or not.

The difficult task is the calculations and estimations involved in computing the ability to pay and the net equity in assets. It would be best if you looked closely into the feasibility of the Offer in Compromise in regards to your financial situation. Sometimes, there are suitable alternatives to Offer in Compromises such as a Partial Pay Installment Agreement or a Currently Non Collectible Status.

Check out America's Best Bookkeepers About Complete Controller® – America’s Bookkeeping Experts Complete Controller is the Nation’s Leader in virtual bookkeeping, providing service to businesses and households alike. Utilizing Complete Controller’s technology, clients gain access to a cloud-hosted desktop where their entire team and tax accountant may access the QuickBooks™️ file, critical financial documents, and back-office tools in an efficient and secure environment. Complete Controller’s team of certified US-based accounting professionals provide bookkeeping, record storage, performance reporting, and controller services including training, cash-flow management, budgeting and forecasting, process and controls advisement, and bill-pay. With flat-rate service plans, Complete Controller is the most cost-effective expert accounting solution for business, family-office, trusts, and households of any size or complexity. Check out America's Best Bookkeepers