Tax season elicits varied reactions from individuals; while some eagerly anticipate their refunds, others face significant stress, especially if they owe money. The prospect of dealing with substantial tax debt can be overwhelming, compounded by the complexity of IRS forms and jargon. For many, the idea of writing a check and moving on is not feasible.
However, there is hope for those in financial distress. The IRS Offer in Compromise (OIC) program provides a critical opportunity for taxpayers to settle their debts for less than the full amount owed, offering a potential lifeline. This program is designed to help those who cannot pay their tax bills in full by allowing them to negotiate a lower payment. Here, we outline the essential factors to consider when evaluating whether an Offer in Compromise is the right move for you.
1. Ability to Pay
The cornerstone of the IRS’s evaluation for an Offer in Compromise is your ability to pay. This involves a comprehensive assessment of your financial situation, including your income, expenses, assets, equity, and future earning potential. The IRS uses this information to determine your Reasonable Collection Potential (RCP), which represents the maximum amount they expect to collect over a specified period.
If your RCP is less than your total tax debt, you might think an OIC is the way to go. However, if the RCP indicates that you can pay more than the proposed offer, the IRS will likely reject your application. Therefore, it’s crucial to assess your financial situation thoroughly before proceeding.
2. Accuracy of Tax Liabilities
Before submitting an Offer in Compromise, it’s vital to ensure that your tax liabilities are accurate. Errors in tax calculations or misunderstandings of tax laws can inflate your debt. In some cases, the IRS may have made mistakes in their assessment.
We strongly recommend hiring a tax professional to review your liabilities. A detailed examination can uncover discrepancies and ensure that the IRS’s assessment is correct. Submitting an offer based on inaccurate liabilities can lead to unnecessary complications and delays.
3. Compliance with Tax Laws
Eligibility for an Offer in Compromise requires strict compliance with all tax filing and payment requirements. You must have filed all required tax returns and be current with estimated tax payments for the current year. Without meeting these prerequisites, your offer will be immediately rejected.
Ensuring compliance is a step you cannot overlook. At Cumberland Law Group, we help our clients verify that all necessary filings are current, providing a solid foundation for their OIC application.
4. Exploring All Payment Options
An Offer in Compromise should generally be considered a last resort. Before deciding to submit an offer, it’s essential to review all available payment options. These can include installment agreements or the “Currently Not Collectible” status, which temporarily delays collections.
Each alternative has its advantages and may offer a more manageable solution depending on your financial situation. It’s important to weigh these options carefully before committing to an OIC.
5. Consideration of the Statute of Limitations
When contemplating an Offer in Compromise, you must also consider the IRS’s statute of limitations for collecting taxes. The IRS has ten years from the assessment date to collect the tax debt. Submitting an OIC pauses this clock, which can impact the overall timeline of your debt resolution.
For example, if you are in the eighth year of the collection period and submit an OIC, the process could extend beyond the remaining two years. Given the IRS’s typical response time of one to one and a half years for an OIC, this might not be in your best interest. Careful timing and strategic planning are essential to avoid inadvertently prolonging your debt situation.
How we can help
We meticulously review these factors to guide our clients in making informed decisions about their tax debt resolution strategies. The Offer in Compromise program can provide significant relief, but it requires careful consideration and expert guidance to navigate successfully.
If you are facing substantial tax debt and considering your options, contact us today for a free consultation. Our experienced team is here to help you evaluate your financial situation, ensure compliance, and explore the best solutions for your unique circumstances. Let us help you achieve the financial peace of mind you deserve.