Financial difficulties may make it difficult for Illinois taxpayers to meet all of their financial obligations. The Internal Revenue Service (IRS) has created a variety of tax settlement options to help taxpayers settle their federal tax debt, often for far less than the full amount owed. Offer in Compromise is one of the popular IRS tax settlement options.
Offer in Compromise or OIC allows Illinois taxpayers to offer a settlement amount to the Internal Revenue Service. If the IRS considers the amount reasonable, they will accept it and will consider all tax liability outlined in the OIC agreement as settled. The main goal of the IRS, through Offer in Compromise, is to position Illinois taxpayers to meet all future tax obligations.
Not all OIC offers will be accepted by the IRS. The IRS will frequently negotiate to find an amount which is reasonable for all parties. An OIC will only be accepted if the IRS believes the debt is not collectible, the amount of debt assessed may be incorrect or collection of the debt would cause an unreasonable hardship for the Illinois taxpayer.
Offer in Compromise can be complicated and time consuming. The IRS will request detailed information about the Illinois taxpayer’s financial records and if the OIC is denied the IRS can use these records to continue debt collection. Penalties and interest will continue to accrue while the IRS is considering the OIC agreement. All Illinois taxpayers who are considering an OIC should contact a tax professional to help determine if it is the best option for them.
Qualifying for Offer in Compromise in Illinois
The IRS does not accept all OIC applications. Currently, the denial rate is approximately 80% for first time offers. More are accepted after negotiations or on appeal. Not all Illinois taxpayers will be approved for an Offer in Compromise. Offers will be accepted if they meet the following conditions:
Doubt as to Liability – If an Illinois taxpayer has doubts as to the amount of tax debt they owe due to an error in calculation or if additional financial data may prove the calculated amount is inaccurate, they may be offered an Offer in Compromise. The IRS does not frequently use this condition.
Doubt as to Collectibility – Under this condition the amount of tax debt owed by the Illinois taxpayer is not in question, only the ability of the IRS to collect the debt either now or in the future.
Effective Tax Administration– Certain Illinois taxpayers will be unable to pay their IRS debt. If paying the debt will cause an inequitable or unfair hardship for the taxpayer, the IRS may be willing to accept an OIC. Taxpayers who are elderly or mentally or physically disabled most frequently meet this condition.
Rejection of Offer in Compromise in Illinois
The IRS frequently denies Offer in Compromise offers, but they do generally allow for negotiations. The IRS has the sole authority to accept and reject offers but they realize settling debt may allow a taxpayer to meet their future tax liabilities. If the IRS chooses not to accept an offer or not to negotiate, Illinois taxpayers will not have legal recourse against them.
The IRS is required to send written notification to Illinois taxpayers if their OIC is rejected. The letter should detail the reasons the OIC offer was declined. In most cases, the IRS considers the offer to low. The IRS should be able to provide a reasonable counter offer.
Appealing an Offer in Compromise in Illinois
Offer in Compromise negotiations can sometimes be done by contacting the IRS administrator who first examined your OIC offer. If the IRS administrator is not able or is unwilling to negotiate an offer more formal appeals can be made.
Formal OIC appeals must be made in writing to the IRS within 30 days from the date of the OIC denial letter. If the deadline expires or if a taxpayer’s financial information has changed substantially, new Offer in Compromise forms must be sent to the IRS. All Offer in Compromise information which is not provided to the Illinois taxpayer can be requested under the Freedom of Information Act.
Completing an Offer in Compromise
All the following tasks must be completed by the Illinois taxpayer for an Offer in Compromise:
- Illinois taxpayers must complete all Offer in Compromise forms and send them to the IRS.
- Financial data must be submitted to the IRS in a timely fashion. Financial information may include: Illinois taxpayer’s pay stubs, banking and vehicle information.
- Illinois taxpayers must file tax returns on or before the tax deadline for the next 5 years.
- All self-employed Illinois taxpayers must pay their federal tax estimates and file their federal tax returns every quarter.
- All tax payments (except the amount outlined in the OIC) must be paid for the next 5 years.
- Illinois taxpayers must pay the amount outlined in the OIC.
- All federal refunds will be applied to the Illinois taxpayer’s tax debt before the OIC offer is accepted.
- The IRS will apply any refund to the Illinois taxpayer’s federal tax debt for the calendar year that the OIC is approved.
Failure to meet all the previous OIC requirements can give the IRS the legal authority to cancel the OIC agreement and reinstate all federal tax debt.
Offer in Compromise Forms
- IRS Form 656- Offer in Compromise. Illinois taxpayers must submit IRS Form 656 to the Internal Revenue Service to provide financial information about their ability to pay their tax debt.
- IRS Form 443 A- Collection Information Statement for Wage Earners and Self-Employed Individuals. Form 443-A provides information to the IRS about the ability of the Illinois taxpayer to pay their debt.
- IRS Form 443-B- Collection Information Statement for Businesses. Form 433-B provides information to the Internal Revenue Service about the Illinois’s taxpayers business. Only submit this form if the business debt is included in the Offer in Compromise agreement.
- IRS Form 656-A- Income Certification for Offer in Compromise Application Fee and Payment. Illinois taxpayers should submit this form if they are requesting an Offer in Compromise fee waiver.