The IRS has announced new rules regarding an Offer-In-Compromise (OIC). Beginning with OIC applications received on or after March 27, 2017, the IRS will return any newly filed OIC applications if the taxpayer has not filed all required tax returns. Additionally, any application fee included with the OIC will also be returned. Any initial payment required with the returned application, however, will be applied to reduce the taxpayer’s balance due. The new rules do not apply to 2016 tax returns with a valid extension.
Prior to this new policy, the return of an OIC was not mandatory. An OIC can be a great alternative if you owe taxes and cannot fully pay your liability, but the approval process can be lengthy, and you will generally have to make a payment with your offer. If you aren’t eligible or if the IRS ultimately rejects your OIC, your payment will not be return and will be applied to your tax liability. If you aren’t sure whether you have filed all required returns, request account transcripts before making assumptions and losing your initial payment.
Several years ago the IRS liberalized the OIC rules under its Fresh Start initiative. Before your offer can be considered, you must: (1) file all tax returns you are legally required to file, (2) have received a bill for at least one tax debt included on your offer, (3) make all required estimated tax payments for the current year, and (4) make all required federal tax deposits for the current quarter if you are a business owner with employees. If you or your business are in bankruptcy, you are not eligible for an OIC.
The two basic payment methods for an OIC are the lump sum cash and the periodic payment. Lump sum cash option requires 20% of the total offer amount to be paid with the offer and the remaining balance paid in 5 or fewer payments within 5 or fewer months of the date your offer is accepted. Under the periodic payment option you must make the first payment with the offer and pay the remaining balance within 6 to 24 months, in accordance with your proposed offer terms.
Before submitting an OIC make sure you are eligible. The IRS has a helpful online OIC Pre-Qualifier that can be found at https://irs.treasury.gov/oic_pre_qualifier/. After answering eligibility questions, you will be asked to input your assets, income, and expenses. At the end the calculator will tell you what your OIC should be under the two payment options.
If an OIC is not the best option for you, consider an installment agreement, which is generally much easier to obtain because in most circumstances you will pay the entire amount of the liability.
JONATHAN KALINSKI specializes in both civil and criminal tax controversies as well as sensitive tax matters including disclosures of previously undeclared interests in foreign financial accounts and assets and provides tax advice to taxpayers and their advisors throughout the world. He handles both Federal and state tax matters involving individuals, corporations, partnerships, limited liability companies, and trusts and estates.
Mr. Kalinski has considerable experience handling complex civil tax examinations, administrative appeals, and tax collection matters. Prior to joining the firm, he served as a trial attorney with the IRS Office of Chief Counsel litigating Tax Court cases and advising Revenue Agents and Revenue Officers on a variety of complex tax matters. Jonathan Kalinski also previously served as an Attorney-Adviser to the Honorable Juan F. Vasquez of the United States Tax Court.