Offer in Compromise or OIC is a popular IRS tax settlement option which Pennsylvania taxpayers can use to settle outstanding IRS tax debt. OIC allows taxpayers to propose a tax settlement amount to the IRS to settle federal tax debt. In some cases, the amount offered and accepted by the IRS may be a fraction of the full amount owed. If the IRS chooses to accept the Offer in Compromise, the Pennsylvania taxpayer’s debt will be settled.
Not all OIC offers will be accepted. Currently the IRS accepts approximately 20% of first time offers, but the IRS may be willing to negotiate with the taxpayer. If the IRS will not negotiate, the taxpayer may be able to file a formal Offer in Compromise appeal.
Pennsylvania taxpayers who fail to pay federal taxes can become the target of aggressive IRS collection actions. The IRS has been authorized by the federal government to use wage garnishments, repossession and bank account levies to recover taxes. All Pennsylvania taxpayers who have IRS tax debt should consult with a tax professional who can provide information for all of the IRS tax settlement options. Offer in Compromise can be used to settle IRS tax debt, but it can be expensive, time consuming and difficult to implement. It will not be the best IRS tax settlement option for all Pennsylvania taxpayers.
Three types of Offer in Compromises:
Many taxpayers who request an Offer in Compromise will not qualify for one. To qualify for an OIC, taxpayers must meet one of the following conditions:
1. Doubt as to Liability – The IRS may accept an Offer in Compromise if the tax debt is in question. Though infrequent, errors can occur due to a miscalculation, misapplication of tax law or if the taxpayer provides additional tax information which has not previously been considered.
2. Doubt as to Collectibility – Under this condition the amount of tax debt is not in question only the ability of the IRS to collect the tax doubt now or in the future. The IRS also may accept the Offer in Compromise if collection costs are too high.
3. Effective Tax Administration- If the IRS believes that payment of the federal tax could cause a hardship which is inequitable or unfair the IRS may be willing to accept an Offer in Compromise. This condition is met most frequently by the elderly or the handicapped.
Rejection of Offer in Compromise in Pennsylvania
The IRS has the authority not only to collect taxes but also to accept or deny Offer in Compromise offers. The IRS denies most OIC offers because they believe the taxpayer’s offer is too low. Pennsylvania taxpayers who have exhausted their OIC appeals will not have any legal recourse against the IRS.
Written notification will be sent to the taxpayer after the IRS denies the Offer in Compromise. The notice will document the reasons the Offer in Compromise was denied and if the IRS believes the offer was too low, they should be able to provide a counter offer. All information which is not provided to the Pennsylvania taxpayer for the Offer in Compromise can be obtained under the Freedom of Information Act.
Appealing an Offer in Compromise in Pennsylvania
If the OIC was denied, Pennsylvania taxpayers can contact the IRS administrator who reviewed their Offer in Compromise to find out if the IRS is willing to negotiate a settlement amount. It is not unusual for the IRS to work with the taxpayer to find a settlement offer which is agreeable to both parties. If the IRS is unwilling to negotiate, a formal appeal can be made by writing a letter to the IRS within 30 days from the date of the OIC denial letter.
The OIC letter should contain the following information:
- The name, address, social security number and telephone number of the Pennsylvania taxpayer.
- A copy of the statement from the Pennsylvania taxpayer outlining the reasons they are appealing the Offer in Compromise denial.
- All proposed changes that the Pennsylvania taxpayer wants updated.
- Information about the tax periods or years in question.
- Information about the federal tax laws which support the Pennsylvania taxpayer’s position.
- The Offer in Compromise appeal letter must be signed by the Pennsylvania taxpayer under penalty of perjury.
Legally Pennsylvania taxpayers can represent themselves for all of the OIC appeals and negotiations, but Pennsylvania taxpayers who prefer to hire legal counsel should contact a tax professional (tax attorney, certified public accountant or an enrolled agent).
Completing an Offer in Compromise
Pennsylvania taxpayers must also complete the following tasks:
- Offer in Compromise forms must be sent to the IRS by the taxpayer.
- Pennsylvania taxpayers must send the IRS all of the information they request which could include employment and vehicle information.
- Federal tax returns must be filled out and submitted to the IRS for the next five years before the federal tax deadline.
- All self-employed Pennsylvania taxpayers must file and submit tax returns each quarter and pay their estimated federal taxes.
- All federal taxes must be paid by Pennsylvania taxpayers for the next 5 years.
- All Offer in Compromise requirements must be met.
- Tax refunds from the IRS will be applied to the Pennsylvania taxpayer’s tax debt for the calendar year that the Offer in Compromise is accepted.
Failure to meet all Offer in Compromise requirements can give the IRS the authority to cancel the OIC agreement and reinstate all IRS tax debt.
Offer in Compromise Forms
- IRS Form 656- Offer in Compromise. Form 656 must be sent by the Pennsylvania taxpayer to the IRS. This form documents the taxpayer’s ability to pay their IRS tax debt.
- IRS Form 443 A- Collection Information Statement for Wage Earners and Self-Employed Individuals. Form 443-A must be sent by the Pennsylvania taxpayer to the IRS to provide additional information about the taxpayer’s ability to repay their IRS taxes.
- IRS Form 443-B- Collection Information Statement for Businesses. Form 433-B must be sent by the Pennsylvania taxpayer to the IRS only if the taxpayer is including their business debt in their Offer in Compromise.
- IRS Form 656-A- Income Certification for Offer in Compromise Application Fee and Payment. Form 565-A must be submitted by the Pennsylvania taxpayer only if they are requesting an Offer in Compromise fee waiver.