People get into debts for different reasons. For some, it’s a case of poor decision-making. For others, it’s because of unexpected medical bills, joblessness, and high standards of living. The problem with debts is that they can take away your dignity. You may feel ashamed to face the lender. This, however, is not the worst feeling. The worst feeling is to know that the lender is coming to collect. Unfortunately, it’s never a pleasant experience.
Now, try to imagine that the collector is the Internal Revenue Service (IRS). The IRS can seize your property, freeze your accounts, and take you to court. But what happens when you cannot afford to pay in full? Wouldn’t you want the taxman to forgive your debt and allow you to pay what you can? Well, this is what an Offer in Compromise (IOC) is made for and it can come to your rescue if approved.
Offer in Compliance: What is it?
An OIC is a settlement agreement reached by you and the taxman where the taxman agrees to receive a definite amount that’s less than the original tax debt. Once the settlement is agreed on, you are expected to clear your tax liability within a specified period. Ideally, there are two forms of OIC:
• Periodic payment OIC – Here, you are expected to pay what you can within 6-24 months upon the approval of the OIC. You are also expected to include the first installment in your application; before your application is even approved.
• Lump-sum IOC – Here, you are expected to pay the proposed payments within 5 months upon the approval of the IOC. You are also expected to deposit at least 20% of the agreed amount.
How Long Does an OIC Approval Take?
In 2012, the IRS announced several changes in the IOC plan. Some of the changes were payment flexibility and fast OIC approval. Generally, the entire OIC approval process may take 3-8 months. Rejection may also take the same amount of time. In case you want to appeal an IOC rejection, you have 30 days to do it.
IOC approval is not a one-step thing. First, you have to propose to the IRS and have your proposal marked ‘processable’. This means that you have met all the basic requirements. They include:
• All your recent tax returns are duly filled
• You are willing to pay the first installment or deposit
• You have estimated your tax payments
• You don’t have a pending bankruptcy case
• You are willing to pay the IOC application fee
• You don’t have late tax payments on your record
• You don’t have a pending investigation with the justice department
• You are not a tax protestant
• You are not a deliberate tax evader
Usually, it takes 3-6 weeks for the IRS to decide if your proposal is should be processed or not. The next stage is sending your IOC proposal to an IOC examiner. The examiner determines your RCP (Reasonable Collection Potential). The RCP is the total value of your asset equity (things you own like cars, houses, retirement accounts, etc.) and household income.
In determining your RCP, the IOC examiner will analyze the submission and audit your assets. This is to establish what you are currently worth. If it’s too complicated, it may take up to 8 months before you can get the examiner’s approval. If there are no challenges, then you’ll have the approval in 4 weeks. It can also be a rejection.
Why the Approval Time Variation?
As seen, most of the time is spent at the IOC examiner office. Most offers take a shorter time to be approved because of the following factors:
• Social security
• Disability income
• Low income
• Fixed retirements
Conversely, those that take the longest time involve the following factors:
• First rejection
• Multiple loans
• Multiple assets
How Can You Hasten the OIC Approval?
Just because some factors slow down the IOC approval process doesn’t mean that there’s nothing you can do to hasten it. Here are some practical tips you can use:
1. Detailed information – The reason why most IOC applications are rejected is that most applicants do not provide complete information on their financials to the IRS. If you are not sure about what kind of information you need to avail, better confirm with the IRS.
2. Hire a professional – It’s advisable not to negotiate for an IOC on your own. You need the help of a certified tax professional. You can count on this professional to help you improve your chances of eligibility and for a quick process.
3. Perform Due Diligence – Before the IOC examiner can assess your property to determine your RCP, you should find someone to perform Due Diligence on your behalf. This helps you come up with reasonable estimates that the IRs will not have a problem accepting. If they find something dubious in your financials, they’ll reject your IOC.
4. A convincing reason – You need a good reason for being unable to pay your tax debt in full. For starters, you should prove economic hardship. In this case, you should mention issues like a disability, an accident, dependents care, old age or a serious health issue.
5. Be realistic in your estimations – You shouldn’t make estimates that are too expensive to pay or too little to make you appear unserious. The IOC examiner should see that you are making an effort and this means quoting reasonable estimates. Besides, the lump sum that you pay is not refundable even if your IOC is rejected. So, you should make it count.
6. No more tax liability – Since you already have an outstanding tax debt, you don’t have to accumulate more. This is why the IRS expects you to stay updated on recent filings. You don’t have to wait until your IOC is approved before you can update your tax returns.
7. Timely, accurate responses – In case the IRS wants to get clarifications from you, you should be ready and available to return their calls. The faster you respond, the quicker the approval. While at it, make sure that your responses are accurate as the taxman is very keen.
If you owe the taxman and you are afraid you can’t pay in full, an Offer in Compromise may be your salvation. So, it’s worth considering. At least, it will save your assets and allow you to pay a comfortable amount over an agreed period.