Hillhurst Tax Group

Offer In Compromise Representation

Hillhurst Tax Group has been helping our clients in Los Angeles with Offer in Compromise tax problems for several years. Let us help you put your IRS tax problems behind you and solve your tax debt once and for all.

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What is an IRS Offer in Compromise?

An offer in compromise (OIC) allows financially distressed taxpayers to settle their tax debts with the Internal Revenue Service for less than the full amount owed. While that sounds like a great deal for taxpayers who owe a lot of money, if you plan to seek an OIC from the IRS you must first show that you cannot pay your entire tax bill through other methods, such as an installment agreement.

Additionally, the IRS usually will not accept an OIC unless the amount offered is greater than the amount it could collect from you through other means. In other words, the IRS must determine that the value of your assets, bank accounts, and future income is less than the OIC amount.

calculating tax problems

Who Can Qualify for an Offer in Compromise?  

For the IRS to accept your Offer in Compromise you must first show that you are suffering from a genuine financial hardship that prevents you from fully paying your tax bill. The IRS usually rejects Offer in Compromises submitted by taxpayers who could pay what they owe under an installment agreement or other means.

Will the IRS accept a lesser amount than the tax bill you owe? Generally the, IRS will look at four factors to decide:

  • Ability to Pay
  • Income
  • Expenses
  • Asset Equity

The IRS has stated that they generally approve Offer in Compromises when the amount offered is representative of the most they can expect to collect in unpaid taxes within a reasonable period of time. Although the IRS does not provide a clear-cut definition of a reasonable time period, your tax attorney or Enrolled Agent may be able to provide you with more information. It is important to note that the IRS has no longer than 10 years to collect your unpaid taxes.

When the IRS evaluates your ability to pay your tax debt, they consider several factors including your monthly income and expenses and your equity in all of your assets. In general, when the IRS considers your monthly income and expenses it is to figure the Reasonable Collection Potential (RCP). The RCP is how the IRS will measure your ability to pay your tax debt. The RCP includes the total amount of money the IRS can expect to receive if it were to place a levy on your assets. It also includes amounts that the IRS anticipates you will earn in the future minus basic living expenses.

The IRS uses Form 433 to determine most of this information. Even if your assets and anticipated future income qualifies you for an Offer in Compromise, you may still be disqualified based on other circumstances. For a full questionnaire that will help you determine your eligibility for an Offer in Compromise, you can visit the IRS website. If tax-related circumstances disqualify you, a tax attorney or Enrolled Agent may be able to help.

Tax-related circumstances that may disqualify you include the following:

  • Must have filed all federal tax returns
  • Must have made all required estimated tax payments
  • Must have submitted all required federal tax deposits if you are self-employed and have employees
  • Must not be in an open bankruptcy.

Estimated tax payments are payments made by individuals who meet certain thresholds for having income that is not subject to withholding. The most common forms of income that are not subject to withholding include self-employment income, interest, and dividends.

IRS Offer in Compromise Case Study

We had one client with a small construction company. The company was an S-corporation and he was an employee of the corporation. James called our office after getting a bill from the IRS owing $45,000. He also had four years of tax returns not filed that his CPA just prepared for him.

The first thing that an IRS tax attorney should do when a client owes a large bill for old tax returns that are not filed is to get the returns filed and the taxpayer back into compliance. James had said his CPA did everything she could but he still ended up owing $45,000. After getting him back into compliance, our Los Angeles tax attorney saw that James is a great Offer in Compromise candidate.

After paying all necessary expenses, James is at a loss of about $1,000 at the end of each month. So we started to get to work on pre-qualifying James for an Offer In Compromise. James’ construction company is projected to bring in $100,000 for the year 2015 in gross revenue. His net income from the business monthly amounts to $2,000 a month. James lives in Los Angeles County and has two dependents living with him. His future income value is $24,000 tbased on him making $2,000 a month in net income.

When our tax attorney submitted the Offer in Compromise to the IRS, the examiner in charge of evaluating the offer took into account his business assets into the Reasonable Collection Potential (“RCP”) formula that the IRS uses to determine if an offer can be recommended for acceptance or rejection. James’ corporate assets from the business are worth around $50,000. The offer examiner incorrectly used this $50,000 as a personal asset which added to James’ equity in the RCP calculation.

Hillhurst Tax Group came out and explained to the officer that according to the IRS revenue code, income producing assets are not to be included in the RCP calculation for an offer. Only if the asset is not used to produce income should it be included. In James case, the $50,000 assets were crucial to the ongoing operations of the business and production of income. According to IRS Manual Section 5.15.1.22, “when determining the RCP, an analysis is necessary to determine if certain assets are essential for the production of income. When it is determined that an asset or a portion of an asset is necessary for the production of income, it may be appropriate to adjust the income or expense calculation for that taxpayer to account for the loss of income stream if the asset were either liquidated or used as collateral to secure a loan.”

James received his Offer in Compromise acceptance letter in the mail and, with the help of our lead IRS tax attorney at Hillhurst Tax Group, was able to settle the debt for only $1,500. Pointing out errors that the IRS makes which contradict the code is one way a tax attorney can be useful to a taxpayer. The IRS is not perfect and its employees do make mistakes.

Call Hillhurst Tax Group today for a free consultation at (323) 486-3314 to see how one of our Los Angeles tax attorneys can help you solve your IRS or state Tax Problem.

IRS Offer in Compromise FAQs

Settling a tax debt through an Offer in Compromise can be a long and complex process that can be intimidating to taxpayers who cannot pay their tax bill because they are already under financial stress.

An offer in compromise (Offer in Compromise) allows financially distressed taxpayers to settle their tax debts with the Internal Revenue Service for less than the full amount owed–which can be very beneficial to taxpayers who owe a lot of money. However, reaching an Offer in Compromise can be a long and complex process. For example, if you are seeking an Offer in Compromise from the IRS you must first show that you cannot pay your entire tax bill through other methods, such as an installment agreement.

Additionally, the IRS usually will not accept an Offer in Compromise unless the amount offered is greater than the amount it could collect from you through other means. In other words, the IRS must determine that the value of your assets, bank accounts, and future income is less than the Offer in Compromise amount.

The experienced offer in compromise attorneys with the Hillhurst Tax Group can help you assess whether the IRS will view you as a good candidate for an Offer in Compromise and whether it will accept the amount of your offer. Our skilled staff will help you prepare and submit your Offer in Compromise and represent you during the appeals process.

It usually takes the IRS about six months to review your Offer in Compromise and let you know if it was accepted. However, in some cases, it can take over a year for the IRS to perform its review. Your Offer in Compromise will be automatically approved if it takes the IRS longer than two years to make a determination.

If the IRS accepts the Offer in Compromise submitted by your tax attorney or Enrolled Agent, you will have the option of paying the tax debt in a lump sum or within 24 months. Upon reaching an agreement to settle your tax debt with the IRS, you must strictly adhere to the terms and conditions of the agreement. Beginning in April 2020, the IRS started requiring that taxpayers offering to make a lump-sum payment submit a 20% non-refundable payment along with their offer. If the taxpayer is proposing to make periodic payments, the first installment must be submitted with the offer.

If the IRS rejects your Offer in Compromise you have the option of appealing the decision within 30 days of the IRS issuing the rejection letter by filing a Form 13711, Request for Appeal of Offer in Compromise. Your appeal will go before an appeals officer with the IRS Independent Office of Appeals. Since the Office of Appeals focuses on settling controversies without litigation, appeals officers often have more latitude to accept an Offer in Compromise than other IRS employees.

If you believe you qualify for an IRS OIC you will need to complete and submit an IRS Form 656, Offer in Compromise. If you are a wage earner or self-employed you must also include a Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals. If you are filing on behalf of a business, you will file a Form 433-B (OIC), Collection Information Statement for Business.

You also must attach a $205 application fee to your form. If you cannot afford the application fee, you may request a poverty waiver by submitting the application fee worksheet included with the Form 656.

After it has received your Forms 656 and 433, the IRS will likely ask for additional documentation, such as pay stubs, bank records, and other information to verify your financial situation.

You have the option of paying your OIC in a single lump-sum payment or in installments. While the IRS is considering your OIC you will need to make any periodic payments that are included in your offer.

If you agree to short-term periodic payments you must repay your tax debt within 24 months. If the IRS agrees to a deferred periodic payment, you must pay your tax debt within the 10 years the IRS has to collect on the debt under current tax laws.

If your Offer In Compromise proposes a lump-sum offer payment to the IRS you will need to include a 20 percent non-refundable deposit with your offer. If you are offering to make periodic payments you must include the first payment with your offer. If your Offer In Compromise is rejected by the IRS the payments will be applied to your outstanding tax debt.

You must include a non-refundable $205 application fee with your IRS Offer in Compromise.

The offer payment and the application fee will be waived if the IRS deems you a low-income individual based on your most recent federal income tax return. A taxpayer may also request a waiver based on the household gross monthly income reported on the Form 433-A that must be included with your application.

To qualify for an Offer In Compromise you must have filed all of the required returns and made all of your required estimated tax for the current tax year.

The IRS usually rejects any Offer In Compromise where the taxpayer has offered to pay an amount that is less than the IRS believes it could recover from you based on your assets, projected future income, and other factors. While the calculations the IRS uses to determine your reasonable collection potential are complex, it does offer an online tool to help you calculate a preliminary offer amount.

The IRS will suspend nearly all of its collection activities while it is evaluating your Offer In Compromise. However, it is still allowed to file a notice of federal tax lien against you and the legal assessment and collection periods will be extended. Additionally, you will need to continue making payments under any existing agreements with the IRS while your Offer In Compromise is under consideration.

The IRS will not accept your Offer In Compromise if you have filed for bankruptcy.

When you reach an agreement with the IRS to settle your tax debt through an Offer In Compromise, you will be expected to comply with its terms. Should the IRS find that you have violated the terms of the OIC you will be found to be in default and the IRS is no longer under any obligation to honor the agreement. The IRS can then take action to collect the entire amount of your original tax debt, including interest and penalties. Any payments you made under the terms of the Offer in Compromise while it was in effect will be applied to your tax debt.

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