20 Aug IRS Debt Programs Available to Taxpayers… by Jamison Walters

Despite huge marketing campaigns from various companies on the subject, many people remain unaware that IRS debt can be negotiated through several debt programs available to taxpayers. Of these programs, two of the most common  are the Offer in Compromise and Installment Agreement with Penalty Abatement.

Offer In Compromise

An Offer in Compromise (OIC) is an IRS debt program instituted by the Internal Revenue Service (IRS) that allows taxpayers to settle their tax debt for less than the full amount owed. This option is available to taxpayers who cannot pay their full tax liability or for whom paying the full amount would create a financial hardship. The OIC program is designed to help taxpayers that are struggling with their tax debt and provide a path out of financial instability.

To qualify for an OIC, taxpayers must meet certain eligibility criteria. They must have filed all required tax returns and made all required estimated tax payments. Additionally, they cannot be in an open bankruptcy proceeding. The IRS considers several factors when evaluating an OIC application, including the taxpayer’s ability to pay, income, expenses, and asset equity. The goal is to determine whether the amount offered by the taxpayer represents the most the IRS can expect to collect within a reasonable period. For example, if a taxpayer owes $50,000.00 in taxes but has $100,000.00 in their bank account—such circumstances would not qualify for the OIC program. This is because the taxpayer can clearly afford to pay the liability outright. However, the taxpayer may still qualify for other IRS debt programs to reduce their amount owed.

Applying for an Offer in Compromise

The process of applying for an OIC involves several steps. First, taxpayers must complete an application package, which includes Form 433-A (OIC) for individuals or Form 433-B (OIC) for businesses, along with all required documentation. They must also submit Form 656, which is used to propose the offer amount. There is a $205 application fee, which is non-refundable, and an initial payment that varies based on the payment option chosen. Taxpayers can choose between a lump sum payment, where they submit 20% of the total offer amount with the application and pay the remaining balance in five or fewer payments, or a periodic payment plan, where they make monthly installments while the IRS considers the offer.

Once the application is submitted, the IRS will review it and may request additional information. If the offer is accepted, the taxpayer must comply with all terms of the agreement, including filing all future tax returns and making all required payments on time. If the offer is rejected, the taxpayer has the right to appeal the decision within 30 days.

The OIC program is not suitable for everyone. It is also important for taxpayers to be cautious when hiring tax professionals to assist with the OIC process, as there are many unscrupulous companies that promise unrealistic results.

The OIC is a valuable tool for taxpayers who are unable to pay their full tax liability. It offers a way to settle tax debt for less than the full amount owed, helping taxpayers avoid financial hardship and providing them a clean slate. While an OIC is in consideration, all IRS collection activity is paused. However, it is important to carefully consider all eligibility requirements and explore other payment options before applying.

Installment Agreement

An IRS Installment Agreement is a payment plan that allows taxpayers to pay off their tax debt over time in manageable monthly installments. This IRS debt program is designed to help individuals and businesses who cannot pay their full tax liability immediately but can afford to make regular payments over a specified period.

To qualify for an installment agreement, taxpayers must have filed all required tax returns and be current with their tax obligations. The IRS offers several types of installment agreements, including short-term and long-term plans. Short-term plans are typically for debts that can be paid off within 120 days, while long-term plans can extend up to 72 months or longer in some cases.

Applying for an Installment Agreement

The application process for an installment agreement involves submitting Form 9465, Installment Agreement Request, either online or by mail. There is a user fee for setting up an installment agreement, which varies depending on the payment method chosen. For example, setting up a direct debit agreement usually has a lower fee compared to other payment methods.

Once the agreement is in place, taxpayers must make their monthly payments on time and in full. Failure to do so can result in penalties, interest, and potential default of the agreement. It is important for taxpayers to communicate with the IRS, through a legal representative, if possible, if they encounter financial difficulties that may affect their ability to make payments.

An IRS Installment Agreement provides a practical solution for taxpayers who need more time to pay their tax debt. Unlike the OIC, the Installment Agreement spreads out the payments for the entire amount owed over several months or years, but it also has the effect of stopping collection action. Part of the Installment Agreement process is to determine if there are any penalties that can be removed as a way of reducing the overall tax liability—this can either be done before or after the Installment Agreement is in place, but it is helpful to have an analysis by a licensed professional to help the taxpayer determine eligibility and timing.

We Can Help

Applying to the IRS, whether an Installment Agreement or Offer in Compromise, is not a simple process and missing a single component will cause the OIC or installment request to be rejected.

Additionally, taxpayers in these circumstances often have a revenue officer assigned to their case who records all communication and will use every legally available method to obtain information to apply tax burdens to as many individuals identified as “responsible parties” as possible. It is important to have the proper legal representation when interfacing with IRS representatives to avoid these pitfalls.

By understanding the process and working with reputable tax professionals, such as the attorneys at Kearney, McWilliams & Davis, taxpayers can successfully navigate these IRS debt programs and resolve their tax debt.

https://www.irs.gov/payments/offer-in-compromise

https://www.irs.gov/payments/payment-plans-installment-agreements

Written by Jamison Walters, Senior Attorney at KMD Law