My last post dealt with two ways of dealing with tax debts: 1) immediately pay in full or 2) discharge the tax debt in bankruptcy. This post deals with two more approaches: 3) enter an Offer In Compromise or 4) enter an Installment Agreement:
3. Enter An Offer In Compromise
An offer in compromise (generally referred to in the IRS literature either as “compromise,” or as “OIC,” though I have had some agents call it an “offer”) is a way to reduce your tax debt and pay the reduced amount over a twenty-four month period. An OIC is similar in spirit to a bankruptcy, but you resolve only your tax liability: None of your other debts are addressed. However, if you have other debts, the payments you make on them can help lower the amount you end up paying to the IRS (for linguistic simplicity I’ll stick with the IRS, but many other taxing authorities have similar ― but not identical ― OIC programs).
There are three grounds under which the IRS will accept an OIC: (a) doubt as to liability; (b) doubt as to collectability; and (c) effective tax administration. Here is the way the IRS describes these three grounds.
A. Doubt As To Liability
The IRS can accept a compromise if there is doubt as to liability. A compromise meets this only when there is a genuine dispute as to the existence or amount of the correct tax debt under the law.
My comment: You’d better have a very good argument, with excellent documentary proof of your position, to win on this one.
B. Doubt As To Collectability
The IRS can accept a compromise if there is doubt that the amount owed is fully collectible. Doubt as to collectability exists in any case where the taxpayer’s assets and income are less than the full amount of the tax liability.
My comment: This is the most common basis for an OIC, and is established in the application and supporting documentation.
C. Effective Tax Administration
The IRS can accept a compromise based on effective tax administration. An offer may be accepted based on effective tax administration when there is no doubt that the tax is legally owed and that the full amount owed can be collected, but requiring payment in full would either create an economic hardship or would be unfair and inequitable because of exceptional circumstances.
My comment: This one is very rare. It can arise, for example, if the taxpayer is an elderly widow living on social security, with her home paid off, meaning that she has a lot of equity. Based on the equity it looks like she can pay the debt, but if she is forced to sell the house to pay the tax, she will be, quite literally (really literally, and not in the Joe Biden (non)sense), out on the street.
D. The Mechanics Of The OIC
You initiate an OIC by submitting an OIC application. Along with the application you must provide copious documentation of your assets, liabilities, income, and expenses, and your tax returns ― even though the IRS already has them. You must also include in the package a $186 filing fee (not required if the grounds asserted are doubt as to liability, or if you qualify for the low income exception ― good luck on that one), and a nonrefundable payment of 20% of the offered amount. Without that 20% payment the OIC will not be considered. Then you wait, and wait, and wait. Did I mention that you have to wait? I really meant it.
Eventually the IRS will assign a local revenue agent to the case. That agent will review the OIC and probably ask for yet more documentation. After you have seen your youth waste away, you will be told whether the IRS has accepted or rejected the OIC. If your OIC has been accepted, you make twenty-four payments and you’re done. Otherwise you must appeal within thirty days of the rejection.
If you have to appeal, you must clearly identify your points of disagreement with the rejection. The appeals officer in charge of the appeal will undoubtedly ask for additional documentation and information. And you will wait, and wait, and wait. Oh, and by the way, you will wait. If your appeal is successful, you make your twenty-four payments, and you’re done. Otherwise, you can appeal to the Tax Court.
One way to reduce the number of payments ― but not the total amount you must pay ― is to borrow the amount you would pay over the twenty-four months and make one big payment.
Very Important Requirement:
As part of the terms of the OIC you are required to remain in compliance with all tax obligations for the five year period that began on the day your OIC was approved. This means that you must file every tax return on time and pay every tax that comes due on time for the full five years. If you fail to comply with this requirement, the OIC will immediately become null and void, and the entire unpaid debt will be due in full.
Releasing Tax Liens
If you’re getting the collection notices, the IRS probably has some tax liens against you and your assets. The Service will not release the liens until after you have completed all of your payments. And it generally will not release the liens without some prompting. Therefore, once you have completed the payments, you must file a lien release request.
Tolling The Collection Statute
If you enter an OIC, you toll the ten-year collection statute of limitations. This means that if you are unsuccessful, perhaps because you were unable to make the payments, none of the time in the OIC contributes to the ten-year collection window. For this reason you need to take the OIC seriously, and enter it only if you plan to follow through.
4. Enter An Installment Agreement
Finally, you can deal with your tax liability using an installment agreement. According to the IRS) (emphasis in original):
If you’re financially unable to pay your tax debt immediately, you can make monthly payments through an installment agreement. As long as you pay your tax debt in full, you can reduce or eliminate your payment of penalties or interest, and avoid the fee associated with setting up the agreement. Before applying for any payment agreement, you must file all required tax returns. . . . Individuals must owe $50,000 or less in combined individual income tax, penalties and interest, and have filed all required returns. Businesses must owe $25,000 or less in payroll taxes and have filed all required returns. If you meet these requirements, you can apply for an online payment agreement.
Notice that in the installment plan you will eventually pay the entire obligation, which may take many years if the collection period still has a long time to run. The benefits are that the penalties and interest are generally waived, and the payments may be quite small if you have a lot of time to pay the debt.
5. Which Resolution Is Best?
If the statutory collection period has almost elapsed, you may wish to wait it out. Keep in mind that if multiple years are involved, you will need to have all of the collection periods about ready to expire if you want to get rid of all of the liability through the passage of time.
If there is still a lot of time on the collection period, and if you are eligible to discharge some or all of the debt in bankruptcy, file a bankruptcy.
Otherwise, the choice is between an OIC and an installment agreement.
The OIC only requires twenty-four payments, and may reduce the amount you have to pay considerably. However, it tolls both the bankruptcy 240-day requirement, and the ten-year collection statute.
While the installment agreement doesn’t toll either the bankruptcy three-year, 240-day requirements, or the ten-year collection statute, it typically involves paying the debt in full, but with the penalties and interest waived. The monthly payments may be lower than in an OIC, but it may take longer to complete, and the total amount paid may be more.
Finally, you can use some combination of these approaches. For example, if some of the debt is dischargeable in bankruptcy, but you would have to wait years for all of it to be dischargeable in bankruptcy, you can file a bankruptcy to get rid of as much debt as possible, and then use an OIC or an installment agreement to deal with the rest. This approach can be especially attractive if you have a lot of nontax debt that is dischargeable.
In this post I have only scratched the surface of tax debt resolution. And as you can see from the post, tax debt resolution is complicated, and involves detailed planning. Don’t go it alone. Hire a highly skilled bankruptcy and tax debt resolution attorney to get you the relief to which you are entitled.