Tax Debt Solutions Blog

Bankruptcy vs. Offer in Compromise

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What is the better option: Bankruptcy or OIC?

If you are having serious problems paying the IRS, bankruptcy or Offer in Compromise can be the way out. One of the most important aspects of choosing either bankruptcy or OIC is how much the settlement amount will be.

Most of the time, you can get the lowest possible settlement amount if you file for a chapter 7 bankruptcy. Here, you need to have assets of little value (which will class it as a ‘no asset’ bankruptcy). The majority of chapter 7 bankruptcies are no asset bankruptcies, since chapter 7 means you have probably ended up at in the worst financial state possible.

So long as you meet three criteria, you will owe the IRS nothing under a “No Asset Chapter 7 Bankruptcy”. These three criteria are as follows:

1. The debt you have to the IRS is in the form of income tax.

2. The bankruptcy was filed at least 2 years after the tax return.

3. All returns you owe money for were filed at least 3 years before you filed for the bankruptcy.

The other type of bankruptcy, a chapter 13 bankruptcy, implies you have the ability to pay the IRS in monthly instalments (either over a 3 or 5 year time period). Many people might go for a chapter 13 over an instalment agreement to avoid the penalties and interest they gather otherwise, which can be a real burden.

As for an offer in compromise, two things are taken into account when the IRS is deciding whether to allow it.

1. Amount of your future cash flow will be.

2. The value of your assets.

If these are above a threshold, they will not allow an OIC. Problems can arise here when the IRS doesn’t take into account certain ‘un-allowed’ expenses, meaning your cash flow is lower than they see it as.

So, when deciding whether to go for bankruptcy or OIC, you really need to think about your expenses and assets, and consider how the IRS is going relate these things to your ability to pay them.

Offer in Compromise vs. Installment Agreement

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Can an IRS Installment Plan or Offer in Compromise Resolve Back Taxes?

A taxpayer’s real fear of not having the money to settle back-taxes is thinking that they cannot do anything about their debt.  Most people are completely unaware that there are IRS sanctioned payment options available.  This means there is a high chance of them qualifying for an Internal Revenue Service tax settlement program.

As a taxpayer, you should always question which Internal Revenue Service tax settlement is best.  Is it the installment plan or the Offer in Compromise?  However, choosing the most suitable option of the two is not always clear cut because every taxpayer has a unique set of circumstances as to why there are back taxes.  Both programs work well depending on the particular situation in question.

There are many reasons why an individual may a large amount in back taxes.  The reasons could be personal hardship, legal judgments, a failed business or unexpected medical costs.  If you can’t pay your tax bill, the Internal Revenue Service makes it possible for you to make them an offer.  This is called an Offer in Compromise.  It is likely you will get a large discount if you apply for this program and so it is suitable for those who owe a large amount.  An added advantage is you get to pay the tax bill once and for all.  You make your offer at a meeting with the Internal Revenue Service.

However, if you do not have the cash means to pay your back taxes in one payment then you should consider an Installment Agreement (or Internal Revenue Service Payment Plan).  You do need to have the money to pay off your debt over a specified period of time.  This is exactly the same as paying off any expensive item by small amounts each month.  Once you agree to a program you have the responsibility of making your payments on time every month.

Tax Relief: 5 Great Ways to Lower Your Offer in Compromise Cost

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5  Ways to Lower Your Offer in Compromise Cost

The key to lowering your offer in compromise cost is knowing how the IRS settlement guidelines work as well as being able to negotiate with the IRS. Here are 5 great ways to lower your offer in compromise cost:

1. Let the IRS know you are considering bankruptcy as another option. If you file as bankrupt, the IRS will get no money and they are fully aware of this, so they will likely listen more to your demands if they think they could get nothing from you if they don’t.
2. Ensure that the offer in compromise cost does not cover certain items of property that are exempt from being included in what you offer the IRS. Such objects include everyday objects you have around your house, as well as certain objects you may have related to your business.
3. You should know how to get to ‘quick’ sale value for your property. You are allowed to sell for 20% below the ‘fair market value’ of the property under the guidelines of the IRS. Such property you should do this for includes houses and cars.
4. The IRS has guidelines related to how much you are allowed for living expenses within the offer in compromise. They will allow you a certain monthly amount for certain things, and you should be aware of what your allowances are.
5. Make sure you know what income you have that the IRS has no right to take from you. Your offer in compromise cost does not include income such as unemployment benefits, social security benefits for those that are disabled or aged and worker’s compensation.

The more you know about the IRS guidelines for your offer in compromise cost, the more you can lower it. Make sure to be as thorough as possible in the settlement process.

How To Appeal a Rejected Offer in Compromise

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Appealing a Rejected OIC

There are two routes to take if your Offer in Compromise is refused:

1. Call the IRS officer who signed the rejection letter or you can make an appeal. 
2. A formal appeal is handled by a different division than the one that refused your offer.

A formal appeal is your last resort.  You don’t have the right to take the IRS to court for a rejection of your Offer in Compromise.  You start the process with a letter formatted by the IRS.  Your appeal must be received by the IRS within thirty days of the rejection date.  The submission of a new offer earlier than six months from the initial rejection date, without notable changes in your financial situation or without a significant hike in your offer, will not be appreciated by the IRS.

If you want the IRS to take your appeal seriously you must do the following:

• Provide all information asked for by the IRS throughout the processing of your offer.
• All previous tax returns have been filed.
• The present year’s payments and filings are up-to-date.
• Self-employed individuals have completed quarterly anticipated tax payments.
• Employers must be up-to-date with payroll tax filings as well as deposits for the present time and two previous quarters.

An appeal does postpone collection.  However, the accrual of interest carries on if a deal isn’t reached.

Offer in Compromise- Rejected

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Awaiting the IRS’ Answer

If your offer requires corrections the IRS will return it.  You correct it and refile.  It’s not unusual.

It takes four to eighteen months for a valid offer to be scrutinized prior to a decision.  You must keep making payments according to the current installment agreement.  Only permission from the IRS can stop such payments.  You must file a tax return on time or file an extension and pay the taxes outstanding.  If you don’t, the IRS can refuse an OIC.  An acceptance is automatic if the IRS doesn’t contact you within twenty four months.

If Offer Is Initially Rejected- Keep Trying!

When an offer is refused, the IRS must give an explanation in writing.  An Offer in Compromise can be refused due to:

• An offer being too low
• Insufficient information

If the amount is too low, the written explanation must tell you what amount is satisfactory.  You must be provided with a copy of the list of features responsible for the refusal.  This is your right according to the Freedom Information Act.

When you know the reason for refusal you must write a letter with a fresh offer that differs from the first.  Your financial situation must be more or less the same.  Affirm that your reason for a change of offer is to increase the amount.  If your offer differs significantly from the first offer then complete a new Form 656.  The IRS will assist you in making a more suitable offer.

In order to help you, it is permissible for you to call the IRS at 800-829-1040 to view Offers in Compromise that were accepted within the last year.  These offers are a matter of public record for a full year; private details are not made public.  You must go to an IRS office to see such documents.  Doing this, will provide you with a better idea of what an offer should contain to be deemed acceptable by the IRS.

Offer in Compromise: The Pros and Cons

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Pros and Cons:  Offer in Compromise

Pros:

• If an OIC is granted, it saves money if your offer has interest continues to accrue and deferred payments according to the OIC and not the initial sum owed.
• If your offer is turned down there is less stress during the procedure because usually property and salaries aren’t seized during that time.
• Tax liens must be relinquished by the IRS within thirty days of receiving the agreed amount for an OIC from you. When a Certificate of Release of Federal Tax Lien becomes public your credit rating recovers.

Cons:

• Once an OIC is agreed to you are obligated to file upcoming tax returns and make tax payments on time for five years.  This applies to payroll tax and estimated business tax, if self-employed.
• If accepted or rejected, the IRS has more time to collect tax owed when you file an offer.  They add the time the offer is under deliberation and thirty days to the usual limitation of ten years to collect.
• All tax refunds before your offer and during the year of acceptance by the IRS must be forfeited.  You may have to forfeit refunds for three to five years.
• Subsequent to submitting an offer you may not appeal to the IRS or court for years stated in the offer.  This applies if offer is accepted or rejected.
• The IRS will revoke an offer after acceptance if you were untruthful.
• It’s not usual but the IRS can audit you during the OIC process depending on what you reveal or withhold.
• The OIC can be revoked if you don’t make a payment.  You will be liable for the initial amount, penalties and interest.  The same pertains if you don’t file and pay all taxes for five years prior to an OIC acceptance.

Tax Relief: Offer In Compromise

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Offer In Compromise: What Amount Should You Offer?

Your offer must be the same as your realistic value of assets and the sum of money that could be taken from potential earnings.  Possible value of assets is what could be collected if the IRS levy assets immediately and sell them same day after debts, such as mortgage.  The IRS concedes a QSV (Quick Sale Value) i.e. twenty percent beneath fair market value.

Most domestic property, appliances, furniture and clothing aren’t regarded as luxuries.  Items such as valuable antiques or mink coats must be separately listed.   Include retirement plans balances with assets.  Penalties and income tax for premature allocation subsequent to cashing in may be discounted.  Certain property can’t be levied or seized.

Deduct essential living costs from total monthly income to get an approximate future income.  The outcome is disposable income and the minimum must be about the same as your monthly payment if granted by the IRS.  Disposable Income number must be multiplied by a number dependent on type of payment plan.  There are three plans: Cash Offer, Short Term Deferred and Deferred Offer.

Unique Conditions:  Efficient Tax Administration

You may have too many assets even with a minimum total.  If selling those assets were to instigate economic hardship, the IRS may take less than asked for under normal regulations.  Selling a home or cashing in retirement plans could cause hardship.

The IRS favors certain individuals:

• Older than sixty in dire financial straits
• With psychological or physical conditions
• With HIV
• With drug addiction or alcoholism
• Those related to addicts or alcoholics causing financial hardship

The above must be proved by financial or medical records and information.  With Forms 656 and 433, include a letter detailing your problems.

Tax Relief: Your Offer In Compromise Questions Answered

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Ways to Avoid Mistakes with IRS OIC Forms:

• Use most current forms to fill in marital status, spouse tax liability, social security number and employer ID.

• Fill in two individual forms if you owe business and personal tax; divide tax type and periods.

• Forms with deletions of preprinted items or alterations will not be processed.

• If both spouses submit an offer, both must sign.

If you made mistakes on your forms, you may resubmit; but it will delay the process by weeks or months.

How Much You Must Pay?

Lump sum offers are made up of five payments or less.  A twenty percent deposit is necessary with your first offer forms.

Installment payment offers are in excess of five payments.   Your first forms must be submitted with one full monthly payment and then every month until your tax bill is settled.

A $150 application fee is required if there is no incomplete payment accompanying your offer beneath the lump sum or installment rules.  It can be put aside if you can’t afford the fee.  Submit an Application Fee Worksheet in Form 656 booklet.  Make check or money order payments to ‘United States Treasury’.

Tax Debt Relief Help: Protecting You and Your Assets

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Safeguarding Yourself after Disclosing Finances to the IRS

After your interview, the IRS will know where you live, work, bank etc.  They can easily confiscate assets and wages so be sure to safeguard yourself. You don’t have to let them know if you change employers, banks or sell assets the day after verbal or oral disclosure but, you must give information that is presently accurate.  Switching banks is a lawful short term option.  Leave a small amount in an account and move the surplus to a different bank.

Only interest bearing accounts are conveyed to the IRS at the end of the year.  Open an account in a different location or state from where you reside.  Only pay the IRS with money orders or through your old account.  Each payment’s account is recorded by the IRS so don’t supply you new account number(s).  However, if you are asked to complete Forms 433-A or –B, you must disclose new accounts.

Collector’s Next Move

After assessing forms 433-A and –B the IRS could:

• Demand payment immediately if there is proof that you can pay
• Request that you get a loan from a bank, finance company, or relative company or relative
• Request you sell assets in order to pay the IRS
• Recommend an Offer in Compromise
• Suggest a payment plan
• Advise you of bankruptcy alternatives
• Start imposed collection i.e. levy accounts, other assets and wages
• Describe your case as presently uncollectible

Revenue Officers check information supplied by you.  If you transfer your assets or ask family members to hold your assets they will act severely.  Fake transfers are unlawful and the IRS can seize them.

Tax Relief: It’s No Party When an IRS Revenue Officer Calls

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No taxpayer wants an unexpected visit from the IRS.  Collection employees sent by the IRS are known to be highly experienced and worldly enough to take on cases that involve big money.  These are cases that are specifically recognized as being noteworthy to the IRS.  Special attention is allocated to repeat offenders, non-filers, businesses and employment tax liabilities.  The purpose of the Revenue Officer is restricted to a local area not far from your business or home.  These Officers are ‘field agents’ and have to leave the office and go into the environment of those chosen as special cases.

There is no doubt that if you have been handed over to a Revenue Officer of the IRS you will be paid a visit and it will be a surprise visit to either your business or home.  It has been noted that most surprise visits take place on prior to holiday weekends and also on Fridays.  The IRS Officer will leave behind a calling card in the case of you being away.  The calling card will ask you to get in touch with the IRS by a specific date.  In the event you do not act in accordance with the request, the Revenue Officer can summon you to an office of the IRS. 

A Revenue Officer will proceed to get your receivables, wages, bank accounts and retirement accounts should you not willingly work with the IRS.  In addition, a Revenue Officer has the power to take control of business apparatus and vehicles.  However, this is a final alternative if the case in question is critical.  It is important to bear in mind the objective of a Revenue Officer is to make a decision in order to shut a file.  In order to do this it may take an installment agreement, offer in compromise or your case being declared uncontrollable.  Your particular finances determine the outcome and it helps to cooperate as much as you can.