Tax

Settling Tax Debt With an IRS Offer in Compromise

An offer in compromise (OIC) is an agreement between a taxpayer and the Internal Revenue Service that settles a taxpayer’s tax liabilities for less than the full amount owed. That’s the good news. The bad news is that not everyone is eligible to use this option to settle tax debt. In fact, nearly 60 percent of taxpayer requested offers in compromise were rejected by the IRS. If you owe money to the IRS and are wondering if an IRS offer in compromise is the answer, here’s what you need to know.

Who is Eligible?

If you can’t pay your full tax liability or doing so creates a financial hardship, an offer in compromise may be a legitimate option. However, it is not for everyone, and taxpayers should explore all other payment options before submitting an offer in compromise to the IRS. Taxpayers who can fully pay the liabilities through an installment agreement or other means, generally won’t qualify for an OIC.

To qualify for an OIC, the taxpayer must have:

• Filed all tax returns.
• Made all required estimated tax payments for the current year.
• Made all required federal tax deposits for the current quarter if the taxpayer is a business owner with employees.

IRS Acceptance Criteria

Whether your offer in compromise is accepted depends on a number of factors; however, typically, an offer in compromise is accepted when the amount offered represents the most the IRS can expect to collect within a reasonable period of time. This is referred to as the reasonable collection potential (RCP). In most cases, the IRS won’t accept an OIC unless the amount offered by a taxpayer is equal to or greater than the reasonable collection potential (RCP), which is how the IRS measures the taxpayer’s ability to pay.

The RCP is defined as the value that can be realized from the taxpayer’s assets, such as real property, automobiles, bank accounts, and other property. In addition to property, the RCP also includes anticipated future income minus certain amounts allowed for basic living expenses.

The IRS may accept an OIC based on one of the following criteria:

Doubt as to liability. An OIC meets this criterion only when there’s a genuine dispute as to the existence or amount of the correct tax debt under the law.

Doubt as to collectibility. This refers to whether there is doubt that the amount owed is fully collectible such as when the taxpayer’s assets and income are less than the full amount of the tax liability.

Effective tax administration. An offer in compromise may be accepted based on effective tax administration. This refers to cases where there is no doubt that the tax is legally owed and that the full amount owed can be collected but requiring payment in full would either create an economic hardship or would be unfair and inequitable because of exceptional circumstances.

Application and Fees

When requesting an OIC from the IRS, use Form 656, Offer in Compromise, and also submit Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals. If you are applying as a business, use Form 433-B (OIC), Collection Information Statement for Businesses. A taxpayer submitting an OIC based on doubt as to liability must file additional forms as well.

A nonrefundable application fee, as well as an initial payment (also nonrefundable), is due when submitting an OIC. If the OIC is based on doubt as to liability, no application fee is required, however.

If the taxpayer is an individual (not a corporation, partnership, or other entity) who meets Low-Income Certification guidelines they do not have to submit an application fee or initial payment and will not need to make monthly installments during the evaluation of an offer in compromise.

The initial payment is based on which payment option you choose for your offer in compromise:

• Lump Sum Cash. Submit an initial payment of 20 percent of the total offer amount with your application. If your offer is accepted, you will receive written confirmation. Any remaining balance due on the offer is paid in five or fewer payments.
• Periodic Payment. Submit your initial payment with your application. Continue to pay the remaining balance in monthly installments while the IRS considers your offer. If accepted, continue to pay monthly until it is paid in full.

If the IRS rejects your OIC, you will be notified by mail. The letter will explain why the IRS rejected the offer and will provide detailed instructions on how to appeal the decision. An appeal must be made within 30 days from the date of the letter.

Questions?

If you have any questions about the IRS Offer in Compromise program, don’t hesitate to contact the office for more information.

• By Leon Clinton
• September 4, 2019

Tax Due Dates for September 2019

September 10

Employees Who Work for Tips – If you received $20 or more in tips during August, report them to your employer. You can use Form 4070.

September 16

Individuals – Make a payment of your 2019 estimated tax if you are not paying your income tax for the year through withholding (or will not pay in enough tax that way). Use Form 1040-ES. This is the third installment date for estimated tax in 2018.

Partnerships – File a 2018 calendar year income tax return (Form 1065). This due date applies only if you were given an additional 6-month extension. Provide each shareholder with a copy of Schedule K-1 (Form 1065) or a substitute Schedule K-1.

S corporations – File a 2018 calendar year income tax return (Form 1120S) and pay any tax due. This due date applies only if you made a timely request for an automatic 6-month extension. Provide each shareholder with a copy of Schedule K-1 (Form 1120S) or a substitute Schedule K-1.

Corporations – Deposit the third installment of estimated income tax for 2019. A worksheet, Form 1120-W, is available to help you make an estimate of your tax for the year.

Employers – Nonpayroll withholding. If the monthly deposit rule applies, deposit the tax for payments in August.

Employers – Social Security, Medicare, and withheld income tax. If the monthly deposit rule applies, deposit the tax for payments in August.

• By Leon Clinton
• September 2, 2019

ITINs (Individual Taxpayer Identification Numbers) are used by people who have tax filing or payment obligations under U.S. law but who are not eligible for a Social Security number. Under the Protecting Americans from Tax Hikes (PATH) Act, ITINs that have not been used on a federal tax return at least once in the last three consecutive years will expire Dec. 31, 2019. Furthermore, ITINs with middle digits 83, 84, 85, 86 or 87 that have not already been renewed will also expire at the end of the year. Others do not need to take any action.

Affected taxpayers who expect to file a 2019 tax return in 2020 must submit a renewal application by filing Form W-7, Application for IRS Individual Taxpayer Identification Number. With nearly two million ITINs set to expire at the end of 2019, affected taxpayers should submit their renewal applications as soon as possible to avoid refund delays next year.

The IRS began sending the CP48 Notice, You must renew your Individual Taxpayer Identification Number (ITIN) to file your U.S. tax return, in early summer. This notice explains the steps to take to renew the ITIN if it will be included on a U.S. tax return filed in 2020.

Taxpayers who receive the notice after acting to renew their ITIN do not need to take further action unless another family member is affected. ITINs with middle digits of 70 through 82 have previously expired. Taxpayers with these ITINs can still renew at any time if they have not renewed already.

How to Renew an ITIN

Form W-7. To renew an ITIN, a taxpayer must complete a Form W-7 and submit all required documentation. Taxpayers submitting a Form W-7 to renew their ITIN are not required to attach a federal tax return. However, taxpayers must still note a reason for needing an ITIN on the Form W-7.

Family Option. Taxpayers with an ITIN that has middle digits 83, 84, 85, 86 or 87, as well as all previously expired ITINs, have the option to renew ITINs for their entire family at the same time. Those who have received a renewal letter from the IRS can choose to renew the family’s ITINs together, even if family members have an ITIN with middle digits that have not been identified for expiration. Family members include the tax filer, spouse and any dependents claimed on the tax return.

Spouses and dependents residing outside of the U.S.. If your spouse or dependent lives outside the U.S., they only need to renew their ITIN if filing an individual tax return, or if they qualify for an allowable tax benefit (e.g., a dependent parent who qualifies the primary taxpayer to claim head of household filing status.) In these instances, a federal return must be attached to the Form W-7 renewal application.

Important Reminders

As a reminder, the IRS no longer accepts passports that do not have a date of entry into the U.S. as a stand-alone identification document for dependents from a country other than Canada or Mexico, or dependents of U.S. military personnel overseas. The dependent’s passport must have a date of entry stamp, otherwise, additional documents are required to prove U.S. residency.

Federal tax returns that are submitted in 2020 with an expired ITIN will be processed. However, certain tax credits and any exemptions will be disallowed. Taxpayers will receive a notice in the mail advising them of the change to their tax return and their need to renew their ITIN. Once the ITIN is renewed, applicable credits and exemptions will be restored, and any refunds will be issued.

Don’t hesitate to call if you have any questions about renewing ITINs.

• By Leon Clinton
• August 28, 2019