Fresh Start Tax Program

How Much Does The IRS Usually Settle For With An Offer In Compromise?

How Much Does The IRS Usually Settle For With An Offer In Compromise?

The typical amount an individual receives back from the IRS in a settlement is $6,629. Doesn't that sound great?

Sadly, it's not that easy. In 2014, the IRS 68,000 offers in compromise from taxpayers.

The IRS accepted 27,000 offers, which equals a 40% success rate. If you're more of an optimist, that means the rejection rate is at 60%. A total of $179 million was accepted in those offers- that equals an average settlement of $6,629.

However, this does not guarantee that the IRS will accept your offer for that sum or even at all. In fact, the IRS has a very precise way of calculating the worth of an OIC and whether they should reject or accept it. Your success with them depends entirely on how you compare to their formula.

Being in debt to the IRS is a tough spot for many taxpayers. They often don't have the money to pay everything they owe, but don't want to set up a payment plan. These people may be eligible for an offer in compromise.

An offer in compromise lets a taxpayer repay only part of what they owe to the IRS. To see if they qualify, the taxpayer needs to show that they can't afford to pay everything and that paying less would be best for them as well as the IRS. If an offer in compromise is accepted, it could provide relief for a taxpayer who is struggling with their taxes.

How Can I Qualify For An Offer In Compromise?

How Can I Qualify For An Offer In Compromise?

In order to be qualified for a tax settlement, there are numerous pre-requisites that must be met:

Before you attempt to make an offer to the IRS, double-check that you're eligible and understand what they take into consideration.

The first factor that will be considered when determining if you are eligible for a compromise is your justification for requesting one.

An offer in compromise will only be accepted by the IRS for any of these reasons:

  • You question whether the IRS was exact in how much money you owe them.
  • Your assets and income are less than the amount you owe, meaning that it's uncertain whether the debt is fully collectible.
  • Though you technically owe the debt and can pay it off, doing so would result in severe financial difficulties. This is what's called effective tax administration.

If you are making an offer in compromise for either the second or third reason, the IRS will take other relevant factors into consideration.

How The IRS Makes Decisions About Offers In Compromise

The IRS uses your financial information to calculate how much it thinks it can reasonably get from you now and in the future, which is called your “reasonable collection potential” or RCP.

The Internal Revenue Service (IRS) will accept an offer in compromise (OIC) if the amount offered by the taxpayer is at least equal to their reasonable collection potential (RCP). The RCP is how much money the IRS believes it can pay. It includes not only things like real estate and vehicles but also anticipated future income less amounts allowed for basic living expenses.

How The IRS Makes Decisions About Offers In Compromise

Payment Options For Paying IRS

Two options for paying your newly lowered tax bill are available with an IRS offer in compromise.

1. Lump sum

You have five months to pay. Along with your application fee, you must also submit 20% of the amount you're offering. Keep in mind that this is non-refundable, even if your offer gets rejected by the IRS (they will just put it towards your tax bill).

2. Payment plan

You have 24 months to pay. Include the first payment with your application (in addition to the application fee). Even if your offer is rejected by the IRS, this money cannot be refunded (the IRS will just apply it toward your tax bill).

While you wait for a decision on your offer in compromise from the IRS, you are able to make debt-relief payments.

How Much Does The IRS Usually Settle For With An Offer In Compromise?
What Are the Disadvantages of an OIC?

Not only is it a painstaking process to provide the IRS with every detail they request, but it can also take up an entire year. And if you choose to appeal their decision, be prepared to wait several more months.

Maintaining compliance with your taxes for five years is non-negotiable if you want the OIC to go through-- deviations give the IRS free reign to take back the agreement and demand that you pay the entire liability.

An OIC (Offer In Compromise) also postpones the 10-year statute of limitations. The IRS has four years to collect money owed from the time they assess taxes, and this timeframe starts six years after the original due date. However, if an offer is made and rejected, the IRS only has four years left to request payment.

Common Errors Taxpayers Make While Going Through The OIC Process

The Fresh Start Initiative provides taxpayers struggling with tax debt the opportunity for help through solutions like an IRS Installment Agreement or Offer in Compromise program. Though, requesting these comprise alternatives can be confusing. The following are some of the more frequent errors people make when petitioning for an Offer in Compromise:

Accumulating More Tax Debt:

You might be in the process of asking for leniency from the IRS, but that doesn't mean you can neglect your current taxes. If they see you're adding to what you already owe, there's a chance they'll deny your request. Furthermore, if you fall behind on your taxes, it could result in additional debt through penalties, fees, and interest.

Failing To File Returns:

Applying for an Offer in Compromise can be a confusing process, but one thing you need to make sure of is that you have filed all of your tax returns—even if they are from previous years. Failing to file your taxes comes with its own set of penalties, including the failure to file a fee.

Making Mathematical Errors:

An easy way for the IRS to reject your offer is if there's a mathematical error, so be sure to check and double-check your work (or have someone else do it). Offer in Compromise proposals require supporting documents, make sure all of them are accounted for and that everything lines up.

Leaving Blank Spaces:

Incomplete lines on Form 656 or Form 433 will arouse suspicion from the IRS, as they will think you're deliberately omitting information. Be sure to fill out every line completely, and if you are uncertain about anything, seek guidance from a tax specialist.

Giving Up.

After your Offer in Compromise is rejected, don't despair. The IRS's decision is not final; you have 30 days to file an appeal and potentially reduce your financial obligations. Be sure to organize all of your evidence and supporting documents logically to make the best case for the IRS.