Experienced Minnesota Tax Lawyers in Edina and St. Anthony, MN
An offer in compromise (OIC) is an agreement between a taxpayer and the IRS in which the taxpayer’s liabilities are settled for less than the total amount owed, based on doubt as to liability (rare), or doubt as to collectibility. The tax attorneys at Pridgeon & Zoss, PLLC, can help you determine if you qualify for an OIC and help you through the process if you do.
Offers in Compromise Based on Inability to Pay
The IRS will examine the taxpayer’s assets and liabilities in conjunction with income and expenses; applying set formulas to detertmine the taxpayer’s “reasonable collection potential,” IRS will determine whether the taxpayer is able to pay the outstanding liability. Our office reviews your financial information and works to ensure all of your expenses and liabilities are captured in the documentation submitted for review. Based on the financial information provided, we will advise you regarding an anticipated OIC amount so you will be prepared. If IRS accepts your OIC, your total tax liability will be settled at a discount, and you will be relieved of the remaining amount.
Conditions for IRS Offers in Compromise
The IRS requires taxpayers who accept an offer in compromise to:
- Stay current on filing and paying taxes for five years from the date of acceptance of the OIC
- Remain current in filing and paying estimates or withholding taxes for the present tax year
If these conditions are not met, the taxpayer will be considered in default and all of the debt that was discounted in the OIC will be charged in full.
Could an offer in compromise with the IRS resolve your tax debt?
If you owe more in tax debt than you can realistically repay, you should talk to a tax attorney about negotiating an offer in compromise (OIC) with the IRS. An OIC allows you to settle your tax debt for less than the full amount. Getting one approved, however, can be something of a challenge.
In order to qualify for an OIC, you must have 1) filed all of your tax returns; 2) received a bill for at least one tax debt; 3) made this year’s estimated tax payments; and, 4) if you’re a business owner with employees, made this quarter’s required federal tax deposits.
Beyond that, you can attempt to negotiate an OIC if you can demonstrate one of these three things:
- You can’t pay the full amount in taxes owed without significant financial difficulty
- You don’t actually owe the tax you’re being billed for
- There is another good reason why an OIC would be in both your best interest and that of the IRS
According to a former Department of Treasury revenue officer writing for Accounting Today, the acceptance rate for OIC proposals was about 41% in 2018. That year, the IRS accepted 24,000 offers, which together made up about $261.3 million. However, it also rejected 34,000 OIC proposals.
The difference between an acceptance and a denial could be due to overall policy or tied to the individual details of your case. For example, the former revenue officer says that the IRS is most likely to accept your offer if you offer to pay the maximum collectible amount. That is, you’re offering to pay most of what the IRS would be able to get if it entered into collections with you.
You will report information about many factors on a Form 433-A (433-B for businesses) that lay out your financial hardship. This includes your income, your expenses, your assets, your age, your education and your lifestyle. These items, in combination with the Collection Statute Expiration Date will give the IRS a good idea of whether the hardship you claim is real. Expect the IRS to investigate your claims.
A word of caution: If your lifestyle exceeds a certain level, the IRS is likely to determine you do not suffer from significant financial hardship. If you do have the means to pay your taxes but need additional time, you may instead need to negotiate a repayment plan instead of an OIC.
Can Anyone Qualify for an Offer in Compromise in MN?
No. Each year, the IRS actually accepts less than half of the OICs submitted. About 67% of applications were rejected in 2019, proving that acceptance is not an automatic right.
The IRS is very precise on what it considers a qualified application. This means that you must be seeking relief on one of the following grounds:
- Doubt as to Collectibility: The amount you offer must be equal to or more than your reasonable collection potential, which is how much the government could reasonably expect to collect from you. Your income, reasonable living expenses, and family size will all be considered.
- Doubt as to Liability: You dispute the amount that the IRS says you owe. For your OIC to be accepted, you must supply documentation proving your actual tax liability.
- Effective Tax Administration: You may propose an OIC on these grounds if paying your tax bill would create economic hardship for you or if there are exceptional circumstances that affect public policy or equity. Of the three grounds, this one is the most difficult to qualify for.
If you aren’t sure about your eligibility to file an Offer in Compromise, speak to a tax attorney in Minnesota. The attorneys at Pridgeon & Zoss, PLLC have helped many clients resolve their tax disputes through an OIC, and we will give you honest advice about your eligibility.
How Can I Pay an Offer in Compromise?
Once your OIC has been accepted, you have two payment options: one lump sum or periodic payments.
- Lump-Sum: When you submit your application, you include an advance payment that amounts to 20% of what you’re offering. If the IRS accepts, you pay the remaining amount within five months.
- Periodic Payments: A periodic payment plan requires you to submit an initial payment along with your application and then pay the remainder in monthly installments while the IRS reviews your proposal. If the OIC is accepted, your monthly payments will continue, with the goal of paying off your compromised tax debt within 24 months.
As long as you continue making the payments, the IRS will cease all collection activity. If you default, however, you will generally have no appeal rights, so it’s important to propose an arrangement you can afford.
What if My OIC is Rejected?
The IRS may reject your Offer in Compromise for a variety of reasons that include:
- The amount you offered is too low given your current income and potential future income
- You acquired additional tax debt (e.g. you failed to make your estimated tax payments)
- Information is missing from your application
- You have an open bankruptcy proceeding under your name
If your OIC is rejected, you can submit an appeal within 30 days of the date on the notice. In your appeal letter, you should address the issues raised in the rejection letter and provide additional documentation. An appeal could potentially allow you to renegotiate your rejected offer under terms that are acceptable to the IRS.
An experienced tax lawyer at Pridgeon & Zoss, PLLC can prepare and present your appeal and handle all communications with the IRS on your behalf. If an OIC doesn’t work out for you for any reason, we can help you pursue other options, such as an installation agreement.
If you think you may qualify for an IRS offer in compromise, it would be wise to speak with a qualified tax attorney at Pridgeon & Zoss, PLLC, to discuss your options.
From offices in Edina and St. Anthony, our tax lawyers advise and represent clients in communities throughout Minnesota and Western Wisconsin. If you are facing a significant tax liability of $20,000 or more, contact the firm for a no-cost half-hour initial consultation with Minneapolis attorney for tax penalties at Pridgeon & Zoss, PLLC today. Contact us online or by telephone. Within the Twin Cities metro area, call 952-232-0371 or 612-455-8948; or call us toll free 877-221-1651if you are located outside of the Twin Cities metro area. You may also use the convenient email contact form to explain your circumstances and request a consultation.
Weekday office hours are 9 a.m. to 5 p.m. in our Edina office, and 10:00 a.m. to 4:00 p.m. in our St. Anthony office. Evening and weekend appointments may be available by special arrangement.