The mere mention of the Internal Revenue Service (IRS) sends chills down the average taxpayer’s spine. But what about the unlucky person who owes back taxes to the IRS? If you are one of those unfortunate souls, just hearing the three letters “I,” “R,” “S” is enough to make your stomach turn.
Stop. Take a deep breath. Relax.
The first and most important thing that you should know is that owing back taxes is not necessarily a crime for which you’ll be heavily fined or sent to jail. There is a big difference between owing back taxes and out-and-out willful tax evasion. As long as you’ve filed your tax returns in a timely manner and you’ve provided information that, to the best of your knowledge, is truthful and correct, you have little to worry about, except for one thing: Uncle Sam still wants to be paid.
“But if I had the money, I would have paid the taxes and I wouldn’t be in this horrible predicament in the first place!”, you exclaim. Well, granted, but so what? The question you need to ask right now is, “What can I do to make this awful problem go away?” When you owe back taxes, the problem is omnipresent and can consume your life, causing you to be irritable, suffer sleepless nights and generally make you a not-so-fun person to be around.
Well, take heart, because there is a solution to your problem and it comes from a very unlikely source: The IRS.
The fix is known as an “Offer In Compromise” (OIC) and it gives you the opportunity to have your tax debt significantly reduced based on your personal assets, income and other mitigating criteria. How does it work? Well, in short, you basically bare your soul to the IRS and then you make them an offer that you hope they will find acceptable in an attempt to settle your outstanding tax debt with them.
“Oh Yeah, I saw that program advertised on TV…” you say. Yes, more than likely you have; in fact, it’s an almost certainty that you’ve seen most, if not all of the “tax relief” advertisements that are on TV these days. Some of these tax relief professionals even go so far as to use long-forgotten actors who once portrayed lawyers on TV, hoping to exude legal competence to the TV audience in an attempt to peddle their tax relief services. These firms assuredly deliver what they promise, but it’ll cost you $3,000 or more for them to work on your behalf. And remember, your goal is to get out of debt, not deeper in debt!
The simple fact is that if you can read directions, write a short story about yourself (nobody knows you or your situation better than you) and use a calculator, you can surely file your own OIC. Okay, like the little blue train struggling to climb up the hill you’re saying, “I think I can, I think I can…” So, where and how do you get started? Well, just like everything else that involves dealing with the IRS, or any other government organization for that matter, you need forms lots and lots of forms, as well as other types of sorted paperwork. “Where can I get these forms?” you ask. They come from the IRS (of course); they are IRS Form 656, Offer In Compromise and IRS Form 433-A, Collection Information Statement for Wage Earners and Self Employed Individuals. An informative OIC booklet, which includes both forms (656 and 433-A) along with instructions and other helpful OIC information can be downloaded from the IRS’s Web site at: http://www.irs.gov/pub/irs-pdf/f656.pdf. You can also obtain these materials from your local IRS office or by calling the IRS and having them mail the forms and information booklet to you.
But before you start filling out forms and tapping away on your calculator, it would be helpful to know if you’re even eligible to apply for an OIC. The IRS recognizes three situations where it will consider reducing a taxpayer’s tax debt through an OIC. If your situation doesn’t fit at least one of the following three criteria, get ready to write a check to the IRS for the full sum of the back taxes that you owe:
— Doubt as to Liability: There is a question as to whether you owe the tax as assessed.
— Doubt as to Collectibility: Both you and the IRS doubt that you’ll ever be able to pay the tax owed. Here, you simply don’t have (and most likely never will have) sufficient income or assets to pay off the tax debt within a reasonable period of time.
— Effective Tax Administration: The amount of the tax owed is correct and the taxpayer has sufficient assets and income with which to pay the tax. However, collection of the full tax owed would create an undue economic hardship or would otherwise be unfair or inequitable for the taxpayer.
Even if you are “fortunate enough” to have your personal situation fit one of those listed above, there are still a couple more hurdles remaining that you must clear before moving on. First, you must ensure that all of the tax returns that you are required to file, are in fact filed and acknowledged as received by the IRS.
The IRS also requires that you have filed all of your federal income tax returns that were due for all previous tax years or else they will not accept your OIC for consideration. And if you are subject to estimated withholding payments, these payments must be paid up to date for the current tax year or you cannot file an OIC. Now, with all of that said, if you are still in the running, it’s time for you to get to work…
For starters, you need to know that the minimum offer the IRS will consider is $100. There is also a fixed (one price fits all), non-refundable administration fee of $150, which is payable to the IRS. Besides this one-time administration fee, you must also include a payment that is equal to 20 percent of your offer when your initial paperwork packet is submitted. So, if your OIC on your total tax debt to the IRS is $1,000 for example, you must send 20% of $1,000 or $200 plus the fixed administration fee of $150 for a total of $350 due.
Besides the required forms and mandatory payments, you must also write a narrative of your situation, in which you must explain how you got yourself into debt with the IRS. You must also submit copies of your checking account statements, pay stubs and investment statements for the previous three months. But that’s just the beginning–the IRS will also want to see retirement account statements, mortgage information, a listing of all accounts payable and receivable, a complete listing of all of your personal assets and real estate, medical care expenses, child care expense records, life insurance coverage and premiums paid (including details about the cash value of all permanent life insurance policies owned, if any), and details about any alimony or child support payments as well as whatever else they feel like examining.
Before sending your completed offer packet to the IRS, make sure that you check, double check and triple check your paperwork. A paperwork error or a missing piece of required information will most likely result in your offer being returned to you along with your uncashed check. Some of the more common errors that may result in your OIC being returned or “kicked back” are: using an incorrect name; using an incorrect address; using an invalid social security number. Any required forms or payments that are missing, as well as any required signatures that has been skipped may also result in your offer being returned usually unprocessed, which means that as far as the IRS is concerned, it’s as if they never received it.
Here are a few helpful hints that you should follow when dealing with the IRS. Never send original documents otherwise, you may never see them again. It is extremely important that you make and keep copies of everything you send to the IRS. Also, when you mail your OIC packet or any other subsequent OIC paperwork, make sure you send it via Registered Mail; doing so will ensure that there will never be a question as to whether or not the IRS received your mailing.
Also, if and when you ever have a conversation with an IRS representative, make certain you ask for and write down their name and employee number (IRS personnel are required to recite this information at the start of each conversation, so, listen up and be ready to write). Always be polite (no snide remarks or arguing) and be sure to keep detailed notes of your conversation.
If you are claiming you can’t pay because you are disabled, the IRS will want to review health statements from your treating physician or any other health care professionals from whom you are receiving medical treatment. And remember, the Health Insurance Portability and Accountability Act (HIPAA) is out the window when it comes to submitting an OIC. Pretty much nothing is off limits or taboo when you ask for an OIC. And if you read the fine print, you’ll see that the Privacy Act does not apply either. It is, after all, their money that you are asking not to pay back.
After you’ve submitted everything that the IRS requires, be prepared to respond to further information requests from them. You’ll receive these requests in the mail and you will usually have about 15 to 30 days to respond and if you don’t, your OIC may be denied. Remember, it’s extremely urgent that you respond to any subsequent information requests from the IRS; make sure that your reply is submitted no later than or preferably before the deadline set by the IRS; the deadline information is always stated in the letter that you received requesting additional information.
Now it’s time for some good news that’s been hiding out beneath all of this form filing and paperwork copying. When the IRS mails you a notice informing you that your OIC has been received and is under review, something magical happens–all collection activities stop. Also, any new levy or asset seizure activities cease. For a while at least, your tax problems will stop and you’ll have a little time to come up for air and put this issue aside for a bit.At times, it will almost feel as if the IRS is trying to trip you up or wear you out in an attempt to defeat the OIC process. Here, the watchwords are persistence and diligence. Whatever the IRS throws at you, be sure to deal with it head on; little by little, the light at the end of the tunnel will start to appear. Always be diligent when dealing with the IRS. As was mentioned before, keep good notes, copies of all documents and respond to any information requests from the IRS in a thorough and timely manner.
Once you’ve satisfied all of the requirements that have been outlined here, it’s “deal or no deal?” time. The IRS can take one of three actions with your OIC: Accept, Decline or Counter.
If the IRS accepts your offer, it’s time to pay up! The most common forms of payment that the IRS will accept is a personal check, a cashier’s check, a money order, a bank debit card or a major credit card. When you first filed your paperwork, you were given the choice of one of the following three payment options:
— Lump Sum Cash Offer: An OIC is accepted and the tax debt is to be paid in full within 90 days or less of the date of the written acceptance of your offer.
— Short-term Deferred Payment: Payment on an accepted OIC will begin 90 days after the offer has been approved; the balance must be paid in full within 24 months of the offer’s written acceptance.
— Deferred Payment: Once an OIC has been accepted, installment payments will be scheduled to start within 90 days of the offer’s written acceptance by the IRS; they will continue on a monthly basis for the balance of the time remaining based on the collection statute as it applies to your situation.
If your offer is declined, the IRS is really saying “try again.” Here, you may amend and then resubmit your offer for reconsideration. Your other option is to give up and pay the full amount of the back taxes that you originally owed, plus any fines, penalties and interest that may have accrued. Here, you really have little to lose, so, you might as well rework your offer and submit it again for consideration.
A “counter offer” translates into the IRS saying, “We think you can afford more and this is how much we think you can afford.” Here, one of your options is to appeal their offer (the taxpayer’s version of a counter offer) in an attempt to make the IRS see things your way. Your other choice is to accept the IRS’s counter offer and set up a payment plan with them. Whether to accept or appeal an offer is generally a tough call for just about anyone to make. It is usually best to go with what your feelings (or your gut) are telling you.
It is imperative that you become fully aware of a dangerous “trap door” that lurks within the walls of the OIC program. Once your OIC has been accepted and you have started paying down or have paid off your back tax debt, the IRS is still not done with you. You can only do an OIC once; when you play the OIC card, it is truly your one and only chance to resolve a back tax issue in a matter that is favorable to you. If, for whatever reason, you incur a new back tax debt with the IRS, you’re in big trouble! Not only have you used your one and only last chance for redemption, but the IRS can move to invalidate your previous or existing OIC arrangement, which will reinstate your previous back taxes, making them “due and payable” anew. Any such reinstated back taxes will also be subject to hefty fines, penalties and interest.
If you should find yourself in such a situation again, you’ll quickly discover that there’s little or no help available; you might as well move to another country or better yet, another planet. Once you’ve remedied your tax troubles, the key is to stay out of trouble with the IRS for good!
Whatever path you take with your Offer In Compromise, the program is an ideal way to bail yourself out of a tough situation that promises not to go away if you ignore it. And if you’re even remotely considering filing bankruptcy, remember that tax debt is not discharged through bankruptcy. Also, if you are currently a party in a bankruptcy filing, you cannot submit an OIC until the bankruptcy case has been closed or discharged by the bankruptcy court.
So, if you don’t have the income or assets with which to pay off your back tax debt, the IRS’s Offer In Compromise program is your one last chance to make your tax problems go away use it and be sure to use it wisely.