If you’ve got a client who owes money to the IRS, then you are likely already considering helping them through the offer in compromise. The offer in compromise allows one to settle tax debt for less than is owed, and may be a good option for those who can’t pay their full tax liability or who would encounter financial hardship if they did so. What are the chances? Not bad, but not great: In 2018, the IRS accepted 24,000 offers but rejected another 35,000.
Here’s what you need to know to increase your chances of a successful deal:
Be eligible: The IRS will reject any application if the applicant has not filed all the required tax returns and not made any of the required payments. Those who are in an open bankruptcy proceedings are also ineligible. The IRS has a handy Offer in Compromise Pre-Qualifier to confirm eligibility.
Submit the right forms: You can follow step-by-step instructions found in the IRS instruction booklet. Forms needed include:
- Form 433-A
- Form 656(s)
You also need to make the $186 application fee.
Select a payment option: Lump sum cash or periodic payments. For lump sum, you need to submit an initial payment of 20% of the total offered amount; for periodic payments, the first one has to go with the application. Note: There are exceptions for those who meet low-income criteria.
Common problems: Canopy Tax highlights common areas where applicants stumble when seeking a deal:
- Bad math: Filling out Form 433 is hard and requires juggling dozens of complex numbers and figures.
- Blank spaces: Was a space left blank because the question did not apply, because the filer did not know how to answer, or because of an oversight? Either way, figuring out can hold up the process. Never leave a space blank – use “N/A” if that’s what you mean.
- Negative equity: It’s not allowed. If negative equity is the net result, enter 0.
What to do when it comes to negotiation time: If the offer is rejected, you can submit an appeal using Form 13711 within 30 days. If you go into a negotiation, then you need to be prepared with records, evidence, and other documentation in your favor. Also, notes Canopy, don’t be afraid to use an emotional argument, but don’t base your action on it—make it a last resort.
What can you expect? The average settlement amount is just over $6,600, reports one lawyer, with the amount being based on a complicated calculation which includes the amount owed, an asset valuation, cash flow, and how fast the debt is expected to be paid.
Consider alternatives: The offer in compromise may not be the right fit for a particular problem, notes Canopy. Alternatives include installments, payment extensions, and “Currently Non Collectible Status,” which goes to taxpayers who can’t be located, have died, or for whom there will be no collection potential.