Category: IRS-Offer-In-Compromise (OIC)

Offer In Compromise (OIC) means offering to pay the IRS less than you owe to settle your tax debt. Jim explores the pros and cons (and timing issues) of the OIC approach, and how to get your lowest offer accepted by the IRS.

Differences Between RCP Type OIC and ETA OIC: Actual Negotiation Required

I recently represented a woman in her 80s who had been defrauded from most of her life savings. She was forced to liquidate her brokerage and retirement accounts, which created a large tax bill due to income and capital gains. Although she had enough left to pay the taxes, doing so would have left her financially unstable for the rest of her life.

Our only option was an Offer in Compromise (OIC) based on Effective Tax Administration (ETA OIC). A Reasonable Collection Potential (RCP) OIC wasn’t an option because she could technically afford to pay full taxes. After lengthy negotiations, the IRS settled for about half of the taxes owed. The process, however, was far more complicated and subjective than a typical RCP offer. In the end, neither my client nor the IRS was particularly happy, but it was a compromise that allowed her some financial security.

This case highlighted the key differences between an RCP OIC and an ETA OIC—especially during negotiations.

RCP Type OIC (Doubt as to Collectibility)

An RCP-type OIC is for taxpayers who cannot fully pay their tax debt. The IRS calculates its Reasonable Collection Potential (RCP) by looking at income, assets, liabilities, and living expenses. If the taxpayer’s financial situation shows they can’t afford to pay, the IRS may agree to settle for less.

RCP OIC Negotiation:

  • Numbers-Driven: The IRS relies on strict calculations to determine how much the taxpayer can afford to pay.
  • Little Room for Subjectivity: It’s about the numbers. If the offer matches the taxpayer’s RCP, it’s likely to be accepted.
  • Rigid Process: If the IRS determines taxpayers can afford to pay, they likely won’t accept a lower offer.

ETA OIC (Effective Tax Administration)

An ETA OIC is different. It’s for taxpayers who can technically pay their debt but would find it difficult to do so. In my client’s case, paying the full amount would have left her financially vulnerable for the rest of her life.

ETA OIC Negotiation:

  • Focus on Hardship: This type of offer considers personal circumstances, such as age, health, and future financial needs.
  • More Subjective: I had to argue that even though she could full-pay, it would have been unfair. This type of negotiation requires a narrative backed by facts, showing why paying the debt would be unjust.
  • Longer and More Complex: The IRS takes more time to review these cases and has more back-and-forth than RCP offers.

Key Differences in Negotiation

The main difference between an RCP OIC and an ETA OIC is the negotiation focus. With RCP offers, the numbers drive the decision. If taxpayers can’t afford to pay, the IRS will accept less. The process is straightforward and primarily based on financial data.

With an ETA OIC, it’s more about fairness. I needed to show that paying in full would cause undue hardship, even if the taxpayer could technically afford it. These negotiations are more subjective and can be drawn out as both sides work through the details.

In my client’s case, the ETA OIC allowed her to avoid full payment, giving her a chance to live out her final years with some financial peace of mind. While the process was complicated, and neither side was thrilled with the outcome, it was a fair resolution for her situation.

Understanding the Different Types of Offer-in-Compromise: A Path to Tax Relief

An Offer-in-Compromise (OIC) can be a lifeline for taxpayers with overwhelming tax debt. It lets individuals settle their tax liabilities for less than what they owe, but only if they meet specific criteria. This isn’t a free pass. The IRS closely reviews each application, considering your ability to pay, income, expenses, and assets. There are three main types of OICs: Doubt as to Collectibility, Doubt as to Liability, and Effective Tax Administration. Each one applies to different situations. Knowing which one fits your case can help improve your chances of approval.

1. Doubt as to Collectibility (DATC)

This is the most common type of OIC. It applies when you can’t afford to pay the total tax debt. The IRS looks at your income, assets, and allowable expenses to see if you can’t pay the total amount. You must provide detailed financial documents like bank statements and pay stubs to qualify. If the IRS determines that you won’t be able to pay off the debt within the remaining collection period (usually ten years), they may accept your offer for a lower amount.

Given your current financial situation, your offer must be the most the IRS could reasonably expect to collect from you.

2. Doubt as to Liability (DATL)

This type of OIC applies when you disagree with the tax debt or believe it’s incorrect. You might submit a DATL offer if you think there was a mistake in the audit process or if you have new evidence that reduces your liability.

To succeed with this offer, you’ll need robust documentation showing why the IRS’s assessment is wrong or why the amount should be lower.

3. Effective Tax Administration (ETA)

An Effective Tax Administration offer is used when paying the full tax would cause serious hardship. This type of offer is rare. It’s for people who can technically pay the debt, but doing so would leave them unable to meet basic living expenses. For example, an ETA offer might apply if you liquidated a brokerage or IRA account due to fraud and now face high taxes on top of the loss. Even though the debt is valid, the IRS may accept less if collecting the total amount would cause undue financial strain.

Conclusion

Choosing the right Offer-in-Compromise is crucial to improving your chances of acceptance. The OIC process offers a possible solution, whether you’re facing financial difficulties, disputing the tax, or dealing with hardship. Be sure to meet the eligibility requirements and provide the necessary documentation to back your case.

Understanding Common IRS Problems and How a Representative Can Help

Navigating the complexities of IRS issues can be daunting for individuals and businesses. The challenges are numerous, from receiving unexpected notices to dealing with hefty tax bills. Fortunately, IRS representatives can provide valuable assistance in resolving these issues. Here, we’ll explore some of the most common IRS problems and how a representative can help alleviate them.

1. Unfiled Tax Returns

Unfiled tax returns are a significant problem that can lead to severe penalties, interest charges, and even criminal prosecution in extreme cases. Many individuals and businesses fall behind on their tax filings due to various reasons such as personal emergencies, financial difficulties, or simple oversight. An IRS representative can help by:

  • Analyzing your tax situation to determine which returns are missing.
  • Gathering necessary documentation and information to prepare the delinquent returns.
  • Communicating with the IRS to negotiate a manageable resolution plan.
2. Large Tax Bills

Owing money to the IRS is a common issue that can result in wage garnishments, bank levies, and tax liens. Taxpayers often struggle to pay off their tax debt due to financial constraints. A representative can assist by:

  • Assessing your financial situation to determine the best course of action.
  • Helping you apply for an Installment Agreement to pay off your debt in manageable monthly payments.
  • Exploring eligibility for an Offer in Compromise, which allows you to settle your tax debt for less than the full amount owed if you meet certain criteria.
3. Audits and Examinations

Receiving an audit notice from the IRS can be intimidating. Audits can be triggered by various factors, including discrepancies in reported income, unusually high deductions, or random selection. An IRS representative can:

  • Provide guidance on what documentation and information you need to prepare.
  • Represent you during the audit, communicating with the IRS on your behalf.
  • Help you understand and respond to IRS findings, ensuring your rights are protected.
4. Penalties and Interest

The IRS imposes penalties and interest for various reasons, including late filings, late payments, and underreporting of income. These additional charges can quickly add up, making an already challenging situation worse. A representative can:

  • Review the reasons for the penalties and determine if any can be abated or reduced.
  • Help you file a reasonable cause request to have penalties removed if you have a valid reason for not complying with tax obligations.
  • Assist in negotiating payment plans that include provisions for reducing interest accruals.
5. Innocent Spouse Relief

Spouses who file joint returns are jointly and severally liable for any tax debt. However, if one spouse is unaware of errors or omissions made by the other, they may qualify for Innocent Spouse Relief. An IRS representative can:

  • Evaluate your situation to determine if you qualify for Innocent Spouse Relief.
  • Help you gather and present evidence to support your claim.
  • Guide you through the application process, ensuring all necessary documentation is submitted.
Conclusion

Dealing with IRS problems can be stressful and complicated, but you don’t have to face them alone. IRS representatives have the expertise to navigate the intricate tax laws and procedures, helping you find the best possible resolution for your situation. Whether it’s filing overdue returns, negotiating tax debt settlements, or representing you in an audit, a representative can provide the support and guidance you need to resolve your IRS issues efficiently and effectively.

But I Don’t Owe This! When to Use a “Doubt-as-to-Liability” Offer

Have you ever received a notice from the IRS claiming you owe taxes but are certain there’s been a mistake? Maybe you believe the IRS has assessed the wrong amount, or there’s an error in your tax return. In such situations, you might consider submitting a “Doubt-as-to-Liability” Offer in Compromise (OIC-DATL). Let’s dive into what this means and when it’s appropriate to use this option.

What is a Doubt-as-to-Liability Offer?

A Doubt-as-to-Liability Offer in Compromise is a proposal you can submit to the IRS when you genuinely believe you don’t owe the tax debt in question. This type of offer asserts that there is a legitimate dispute over the accuracy of the assessed tax liability. The goal is to settle your tax debt for less than the full amount based on evidence that demonstrates you are not responsible for the total liability.

When to Use a Doubt-as-to-Liability Offer

  1. Erroneous Assessment: If you have solid proof that the IRS has made an error in assessing your tax liability, such as misinterpreting your tax return or using incorrect data, a Doubt-as-to-Liability offer may be appropriate.
  2. Documentation Issues: Sometimes, the IRS may lack proper documentation or misplace your submitted information, leading to an incorrect tax bill. You may use this type of offer to resolve the issue if you provide the missing or corrected documents.
  3. Audit Mistakes: If your tax debt arose from an audit and you believe the auditor made mistakes in calculating your liability, presenting a Doubt-as-to-Liability offer with supporting evidence could help rectify the situation.
  4. Legal Disputes: When there’s a disagreement on the interpretation of tax laws or regulations that led to the assessment, and you have a strong legal argument, this type of offer can be your pathway to resolution.
  5. Incorrect Third-Party Reporting: If third parties, such as employers or financial institutions, have reported erroneous information to the IRS, leading to an inflated tax liability, you can use a Doubt-as-to-Liability offer to correct this.
  6. Errors in Tax Credits or Deductions: If there are mistakes in applying tax credits or deductions that have resulted in an erroneous tax liability, you can present a Doubt-as-to-Liability offer to resolve these discrepancies.

Final Thoughts

The key to a successful Doubt-as-to-Liability offer is thorough documentation and a clear, compelling argument substantiating your claim. By taking these steps, you can address and resolve disputes with the IRS, potentially saving yourself from paying a tax debt you don’t owe.

What to Do If Your Offer-in-Compromise (OIC) Is Rejected

The IRS rejects 60-70% of Offers in Compromise (OIC) submitted by taxpayers. Receiving a rejection for your OIC can be disheartening, but it’s not the end of the road. Here’s what to do next:

Understand the Reason for Rejection: Carefully review the rejection letter. Common reasons include discrepancies in your financial information or the IRS determining you can pay the full amount through a payment plan.

Consider Appealing: If you believe the rejection was unjustified, you can appeal within 30 days. Use Form 13711, Request for Appeal of Offer in Compromise, to start the process. Be ready to provide additional documentation. The IRS does not publish official statistics on OIC appeal success rates, but many tax professionals report high acceptance rates for well-prepared appeals.

Evaluate Alternative Options: If an appeal isn’t viable, explore other avenues. You might qualify for an Installment Agreement to pay off your debt in monthly installments. If you’re experiencing financial hardship, you could request Currently Not Collectible (CNC) status. This temporarily pauses collection efforts.

Remember, a rejected OIC doesn’t mean you’re out of options. By understanding the reasons, exploring alternatives, and seeking expert advice, you can find a viable solution to manage your tax debt.

What are the most Common Problems that cause an Offer-in-Compromise to be Rejected?

If you owe the IRS money, you might be considering an Offer-in-Compromise (OIC) as a way to settle your tax debt for less than the full amount you owe. This is the so-called “pennies on the dollar” approach you hear in ads.

While an OIC can be an excellent way to resolve your tax debt, it’s essential to understand that the IRS does not accept every Offer-in-Compromise that is submitted. In fact, the IRS rejects the majority of OICs that are submitted.
The most common reasons for these rejections include:
    1. Compliance Problem – All of the returns due for the last 6 years have not been filed or the current year’s estimated tax payments are not being made. This results in an immediate rejection of the offer.
    2. Ability to Full-Pay – The IRS has a methodology for analyzing a taxpayer’s financial situation. If the offer amount is below what they determine the taxpayer could pay, they will reject the offer.
    3. Dissipated Assets – The IRS finds that the taxpayer has sold assets to friends, relatives, or lenders sometime in the last 3 years. The IRS’s position is that the cash from these transactions should have been used to pay down the tax debt.
Nobody can guarantee that an OIC will be accepted. However, avoiding these 3 common problems should put you in the 95% chance of success range.

Are you Out-of-Luck when the IRS cannot be convinced that its Assessment is Incorrect?

It happens. The IRS audits you and makes an assessment that you know is wrong. Maybe you missed the audit appointment, and the auditor disallowed all your deductions. Or maybe the IRS has a 1099 or W-2 showing that you have unreported income and you have never heard of the issuer. If you just can’t get the IRS to listen to reason, one of your options is an Offer-in-Compromise based on Doubt-as-to-Liability.

What is an Offer-in-Compromise?

An Offer-in-Compromise is an agreement with the IRS to pay less than the full amount of the assessment. Usually, the basis for this offer is based on the inability to pay the amount before the Statute of Limitations runs. The IRS accepts these offers after doing a financial analysis and concluding that it’s their best option to collect.

The Offer-in-Compromise due to a doubt-as-to-liability is the less well-known sibling to the offer based on lack of potential to pay. Rather than submit financial information, you submit your evidence one last time as to why the assessment is in error. It gives the IRS the option of settling the issue without going through the expense of going to court and possibly losing.

What’s Different about DATL Offers?

There are two major differences. First, the offer can be very low. Second, you are not submitting information about your personal or business financial condition which is full of potential problems if there is an error on the form.

How Much Should You Offer?

This all comes down to how strong is your case. The more likely the IRS is to lose in court, the smaller your offer should be. The minimum I would suggest is $150 so that they can feel like the offer at least covers their processing costs. If it’s a 50-50 likely win for both parties, I would be inclined to make an initial offer between 30 and 50 percent. There will be an opportunity to negotiate the final amount.

Conclusion

All is not lost when it comes to assessments that you believe are in error. Try to use the regular appeals processes first. But if that does not work, then an Offer based on doubt-as-to-liability is well worth trying.

Strategy 5 – Innocent Spouse Claims

An Innocent Spouse Claim is worth considering in cases where the taxpayers jointly owe a lot of IRS debt. The downside is that the IRS does not generally approve these claims. Worse, most of the appeals to the courts have been IRS wins.

That said, it is still worth considering. Innocent spouse claims arise in cases where the tax understatement can be attributed to just one spouse. Additionally,  the other spouse must have no knowledge or benefit from that understatement. The strategic advantage is that you might get a better result on the Reasonable Collection Potential formula by removing the one spouse from the liability.

An Offer-in-Compromise will only work if the taxpayers can show that they do not have the financial means that will enable them to pay the debt in full. The IRS does not accept offers for less than full pay merely because someone throws a number at them. Instead, they do a financial analysis. The results are plugged into the Reasonable Collection Potential formula. Removing one of the spouses from the liability could change the formula results and make the other spouse eligible for an offer.

 

3 Cases: IRS Agrees to Slash Tax Debts

Here are three  reasons why the IRS may accept your Offer-in-Compromise — your offer to pay less tax debt than you owe:

  1. Doubt as to Liability – this applies to taxpayers with good arguments that they do not owe the tax, either partly or completely.
  2. Doubt as to Collectability – taxpayers have neither income or assets to pay their tax debt.
  3. Hardship to Taxpayer – the taxpayer has the funds to pay the full debt but doing so will create an economic hardship. Think of an 80-year-old with a lumpsum payout from their retirement plan. The funds are needed to pay their living costs for the rest of their life.

Wow – sounds very reasonable. Why then is it that most (60%) Compromise Offers are rejected by the IRS? The answer to this boils down to two major categories:

  1. The taxpayer is not current on their tax return filings or has not made their current year estimated tax payments. The IRS will not even consider an Offer if this is the case. First is because the taxes must first be assessed before they can be compromised. Secondly, taxpayers who are not making their current year tax payments will be in default before the ink is dried.
  2. The second big reason for rejection is that the Offer is too small. The IRS looks at both the equity in the assets you own and your future cash flow. The result of this analysis is the Reasonable Collection Potential or RCP Offer less than this amount and the IRS is going to reason that it is not in the best interest of the government to compromise.

What should you do if you think you might be eligible? Figuring out the RCP amount is complex, so it is probably a good time to get professional help. Understanding how the RCP formula works will allow you to arrange your financial affairs in advance of the offer to minimize the offer amount without having it rejected.

Pay Pennies for Dollars Owed?

You see ads on TV about the IRS accepting “pennies on the dollar” to clear a backlog of tax debts. It seems an easy answer to a big problem. But, “too good to be true, usually not true.”

Bad News on Offers-in-Compromise

IRS rejects 60% of compromise offers it gets, per the 2018 IRS Data Book. This makes sense. After all, why would an agency with more collection powers than Herod be willing to forgive debt?  IRS agents certainly don’t win awards for giving away money!

Good News on Offers-in-Compromise

The IRS does accept 40% of the Offers-in-Compromise. These are offers that they decided were in the Government’s best interest to accept. Meaning, that they ran the numbers and decided this was the max they could expect to collect from the taxpayer.

So, how do you tilt the pinball machine to make it more likely to be in the 40% accepted? It starts with running your numbers on potential future earnings with the same formula that the IRS uses. This is called the “Reasonable Collection Potential” formula which calculates your disposable income on a monthly basis. Whatever this amount is times the number of months left before the Statute of Limitations nulls the debt is where the IRS is going to start. To make it into the acceptance column, you must make it a better deal than just sticking with the status quo.

If you or someone you know has received a Notice of Intent to Levy or some other federal or state tax issue, please feel free to contact me at either (352) 317-5692 or email jim@taxrepgainesville.com