If you find yourself grappling with a tax deficiency at the end of a given tax year, the first thing you should do is avoid panicking. You have options to choose from to deal with this problem. The IRS is serious when it comes to collecting its debts, but they are willing to make a deal if the numbers look right. The IRS understands that a whole bunch of things can impact an honest taxpayer’s ability to satisfy his or her tax obligations. Among tax resolution options, tax settlement is perhaps the most attractive. And the reason for this is very simple: tax settlement allows you to take care of your tax debt for less than the full amount owed. In effect, tax settlement is the IRS writing off a portion of your tax debt as uncollectible for one reason or another. Whenever you can settle a debt for less than the full face amount, this has to be regarded as one of – if not the most – attractive options available. If you qualify, this is the silver bullet.
In this article, we will discuss a few key facts about IRS tax settlements. Tax settlements are arranged through something called an “offer-in-compromise,” or OIC. We’ve briefly discussed some of the basics of OICs elsewhere on our site. First, let’s recap the essentials of OICs and then highlight a few finer points which every person considering an OIC should commit to memory. There are many different things to consider when submitting an OIC to the IRS; understanding some of the finer points of the process will help to increase the chances of acceptance. In any case, if you consider an OIC, it’s always a good idea to consult with an experienced tax professional. As we will see, OICs can get tricky, and so having a qualified tax professional to assist you is usually the best approach. This is where the licensed, experienced professionals at Boxelder Consulting come into play.
If any of the information below is above your head, or you have additional questions, call us directly at 303-317-6111 and talk to an expert in IRS Collections and tax relief. We also provide direct business consulting to our small business clients and offer full accounting, payroll and bookkeeping support.
What is an Offer-in-Compromise?
An OIC is literally an offer made to the IRS for less than the full face amount of a taxpayer’s tax debt. Taxpayers generally consider an OIC if they are financially incapable of paying their full tax debt, or if paying their full debt would create undue hardship. In total, there are 3 grounds on which the IRS will consider accepting an OIC: (1) doubt as to liability, (2) doubt as to collectability, and (3) effective tax administration. Doubt as to liability simply means that there is a dispute as to the correctness of the underlying tax debt. Doubt as to collectability means that the IRS has a low chance of being able to collect the full amount. And effective tax administration means that, although there is no dispute as to either liability or collectability, exceptional circumstances provide reason for the IRS to consider an OIC.
Wrapping Your Head Around Reasonable Collection Potential
Out of the 3 grounds on which an OIC may be submitted for consideration, the second (doubt as to collectability) is the most common. When a taxpayer submits an OIC on this ground, the offer must be consistent with that taxpayer’s “reasonable collection potential,” or RCP. Reasonable collection potential is supposed to represent a taxpayer’s ability to satisfy his or her tax obligation. This means that the taxpayer’s entire financial situation must be taken into account. If a taxpayer submits an OIC which accurately reflects his or her RCP, then the IRS will almost always accept the offer.
It’s important to note the IRS will not simply take a percentage of the debt and reduce it without fully understanding your financial condition. Taxpayers often wonder: how much is the IRS willing to settle my debt for? The answer: the amount which is consistent with your reasonable collection potential. The IRS will almost never accept an offer which is less than your RCP. This makes intuitive sense, because if the IRS can expect to receive more through wage garnishment or other forcible procedures, they will do so.
RCP is determined according to a standard formula. The formula is as follows: A + ((B – C) x 12) = D. In this standard formula, A denotes equity in a taxpayer’s assets, B denotes the taxpayer’s monthly income, C denotes monthly living expenses, and D is the offer amount. The number “12” simply represents the number of months which the IRS takes into account to calculate your RCP. Hence, the IRS determines your RCP by examining your financial situation over a 1 year period.
This formula is used when a taxpayer intends to make a lump sum OIC. If a taxpayer wishes to make an OIC which will be paid in installments, then the formula for calculating RCP is slightly different. The installment RCP formula is: A + ((B – C) x 24) = D. The only difference with this formula is that the IRS looks at your situation according to a 24 month (or 2 year) period rather than a 12 month period. In both cases, the IRS will require an immediate down payment of 20%. But, in the case of a lump sum OIC, the remaining balance will be due within 90 days of acceptance, whereas the installment OIC can be paid back within 24 months.
Fortunately, RCP calculation is more taxpayer friendly today than it was in the not-too-distant past. In 2008, the IRS launched the Fresh Start Initiative, and this program was designed to assist taxpayers who need to resolve past tax debt. One way in which it assists taxpayers is in RCP calculation. This program changed the way in which a taxpayer’s income, assets and monthly living expenses are calculated. The program also altered the time periods according to which a taxpayer’s RCP are determined. Now, the time periods are 12 months and 24 months for lump sums and installments, respectively; formerly, prior to this program, the corresponding time periods were 48 months and 60 months.
Another important fact to note – if you are fortunate enough that the IRS approves your offer, you must stay current and compliant for the next five years or the IRS will retroactively reject your agreement. This means you cannot owe additional money to the IRS and you must file all your required tax returns.
Don’t Hesitate to Reach Out
No matter how we look at it, the process of submitting an OIC to the IRS is complicated. As we’ve seen, there are many pieces to the process, and each of these pieces can be quite complex on its own terms. In just about every OIC case, it’s best to have someone with expertise to help you navigate through the process. Having an expert assist you will demystify the process and potentially improve your probability of acceptance. When you consider the stakes involved, submitting an OIC with anything less than complete confidence is not wise. Don’t be penny smart and dollar poor. Always consider the scope of the problem when deciding on hiring any professional. OICs can help you settle your debt and begin the process of rebuilding your financial future. Consequently, you should take the process very seriously.
If you’re considering an OIC as a tax relief measure, don’t hesitate to reach out to one of the qualified tax professionals at Boxelder Consulting today. The tax professionals at Boxelder Consulting are intimately familiar with the process and requirements of offers-in-compromise and would be delighted to assist you with your case. We can take a look at your situation in detail and develop the best route for you to pursue. We will walk you through the process, step by step, and then create a personalized plan which reflects the specifics of your case. Call us at 303-317-6111 and speak with one of our licensed professionals. We believe in second chances. Start your comeback story today.
