Depression level unemployment and record small business closures have made paying the bills difficult for millions of Americans. For many of those, that means the inability to pay income taxes. If you owe money to the IRS and can ill afford to pay in full, an offer in compromise (OIC) may be your best option. An OIC can settle tax debt from any tax year where a return was filed but payment remains in arrears. Late tax returns can also be included, but they must be filed before an OIC request is made.
Hiring a CPA to file an OIC request increases your chances of success and often results in lower amounts due.
What is an OIC?
An OIC is an agreement with the IRS to settle all your overdue tax debt for less than the full amount. It applies to all tax years where the filing date has passed. An OIC covers back taxes, penalties and interest.
When you hear of taxpayers settling their debt for pennies on the dollar, they often achieved this through an OIC.
Who Qualifies for an OIC?
The IRS approves an OIC when the evidence shows it would be unable to collect the full amount, at least not for a very long time. When considering ability to pay, the IRS analyzes a taxpayer’s:
- Asset equity
These criteria provide the IRS with a full picture of the taxpayer’s situation. For example, a loss or reduction in income may be a great reason to propose an OIC, but the IRS will also consider the taxpayer’s expenses and asset equity.
If the taxpayer’s income dropped but it is still plenty to pay the taxes owed and reasonable living and business expenses, an OIC may not succeed. Likewise, if a delinquent taxpayer lost a job or business but has significant liquid assets, the IRS may continue to demand full payment of past due taxes, penalties and interest.
However, if the taxpayer’s situation shows he or she must choose between paying for necessities or taxes, an OIC has a great chance of success.
How a CPA Helps Make an OIC succeed
When filing an OIC, the key question is how much will the IRS forgive? Answering this requires a thorough analysis of the taxpayer’s situation and understanding of IRS policy. When filing an OIC without support, taxpayers often propose an amount higher than they are eligible for.
Three ways a CPA can determine a much lower and successful proposal figure include the following:
Recalculation of taxes, penalties and interest owed
Before proposing an OIC, you want to ensure you have calculated the lowest legally allowable amount due for each applicable tax year. Any tax return you have already filed can be amended downwards if the proper forms are submitted within three years of the due date. A CPA can review previous returns and file for an amendment if there are any errors in the IRS’s favor.
If you have past due unfiled returns, a CPA can file these on your behalf, ensuring the lowest tax, penalties and interest due. This is a necessary step before an OIC can be filed.
The IRS may have filed a Substitute Return (SR) for any year you failed to file. If an SR has been filed, the IRS only allowed minimal deductions. The CPA will file a return with the correct amount, potentially saving you thousands.
Accounting for Your Ability to Pay
The CPA will ask many questions about your income and expenses. The purpose of this is to determine how much you can afford to pay. For an OIC to work, the amount offered must be enough for the IRS to accept, but you do not want to offer too much. A CPA can determine the most realistic figure.
Knowing What the IRS Will Accept
Because every case differs, there are no precise formulas taxpayers can use to determine if an OIC proposal will be accepted. As a result, there is a tendency to leave money on the table due to fear of a rejected offer. A CPA with OIC experience knows what the IRS accepts in different circumstances.
A CPA is also licensed to negotiate with the IRS on your behalf. Because of this, there is a higher likelihood of success. In addition, a CPA can tell you if an OIC is the best way to get tax relief versus other options.
CPAs provide valuable advice and services to taxpayers who need to settle IRS problems. Hiring a CPA greatly increases the chances of OIC success at the lowest possible liability.
If you owe money to the IRS and are overwhelmed with tax problems, Tax Avenger can help. We are an experienced CPA firm specialized in Tax Problem Resolutions. With 20 years’ experience, we will help you reduce your tax liabilities and put together a tax plan for you to ensure that you will not have any future problems with the IRS.
We offer full-service tax solutions for individuals and businesses including accounting services, business startup, payroll services, tax preparation services and more. Call today for a Free Consultation!