By: Edgardo M. Lopez, Esq.
If you owe a huge amount of taxes and are experiencing financial difficulties, don’t despair as there are remedies under the law which will help you avoid paying the whole amount. There are two ways to do it: either you propose a reduced amount to pay off the entire debt at a discount (what we call an Offer in Compromise [OIC]), or negotiate an installment agreement (IA) without changing the amount of what you owe but paying it in monthly installments.
This article will focus on the OIC. Unlike an IA, which still makes you liable for the whole amount of taxes that you owe, an OIC allows you to settle your tax liabilities by paying for less than the total amount due. In other words, an OIC reduces your tax liabilities. For example, if you owe $10,000.00 in taxes, penalties and interests, you can offer to pay for less than this amount, depending on your income and assets. However, not everyone can qualify for an OIC as there are criteria that must be met.
The OIC program was established to serve the interests of both the government and the taxpayer. There are situations when collection of taxes due from a taxpayer is not possible, such as when the taxpayer does not have sufficient income and assets or is suffering economic hardship that makes it unlikely the IRS will be able to collect the full amount due . If these factors are present, the IRS deems these as doubts as to collectability and will grant an OIC petition.
The IRS also approves an OIC application or grants the reduction of debt if there is doubt as to the liability of the taxpayer, like when there is doubt as to the legality of the tax assessed against a taxpayer.
If it is established that there is doubt to collectability or doubt to legality of the tax debt, the IRS will agree to reduce the tax liability. I had a client whose tax liability was about $65,000.00 and I successfully reduced it to $500 (that’s right $500!) pursuant to the OIC program of the IRS.
Aside from the prospect of reducing tax liabilities, submission of an OIC application will suspend collection enforcement by the IRS, such as seizures, wage garnishments or bank levies. In addition, the taxpayer also has the option of offering to pay a reduced amount on an installment basis, up to 24 months. This is called a periodic payment OIC. Of course, nothing prevents the taxpayer from paying the offer amount in lump sum.
Once the IRS approves the OIC, it conclusively settles the taxpayer’s tax liabilities once and for all, including penalties and interest, for the covered years. One of the dangers of an OIC however, is the requirement that the taxpayer strictly comply with the terms and conditions of the agreement. Non compliance will result in the cancellation of the agreement which will make the taxpayer liable to the original amount of the tax debt and is payable immediately. Common examples of non compliance are: failure to pay the monthly periodic schedule, failure to file tax return in the succeeding years or failure to pay future taxes.
OIC is a very technical process and taxpayers are better served if they are assisted by tax professionals. I will help you through the process as I have helped many clients. Give us a call at +1 (855) 411 6398.