Offer in Compromise or OIC is an agreement between the Internal Revenue Service (IRS) and the Hawaiian taxpayer which may allow the taxpayer to settle their IRS tax debt for less than the total amount owed. The Internal Revenue Service will only accept an OIC offer if the taxpayer meets certain conditions and the tax amount can not be paid in full or through an installment agreement.
The IRS does not accept all OIC offers, in fact, they currently deny up to 80%. The IRS may be willing to accept an offer if they believe it will put the taxpayer in a position to meet all future tax debt obligations. Failure to pay tax debt can result in wage garnishment, property repossession or bank account levies.
Hawaiian taxpayers who are considering an Offer in Compromise may want to contact a tax professional. Offer in Compromise can be expensive, time consuming and difficult to implement. It is only one option for Hawaiian taxpayers and may not be the best option.
Three types of Offer in Compromises:
1. Doubt as to Collectibility – The IRS doubts the Hawaiian taxpayer will be able to pay the full amount of their tax debt within the statutory time for tax collection.
2. Doubt as to Liability- There must be a legitimate doubt that the amount of IRS tax debt assessed against the Hawaiian taxpayer is correct. This can occur if the IRS examiner made a mistake in the interpretation of the law, the IRS examiner did not consider all of the taxpayer’s financial evidence, or the Hawaiian taxpayer can produce new evidence for the IRS.
3. Effective Tax Administration- The amount of tax debt assessed is correct and the IRS may be able to collect the tax debt, but there is some extenuating circumstance which makes the IRS think payment of the tax debt would cause an economic hardship which is unfair or inequitable.
Rejection of Offer in Compromise in Hawaii
The Internal Revenue Service has been given sole authority to collect taxes and to determine if they will accept Offer in Compromise offers. If the IRS denies a Hawaiian taxpayer’s OIC offer, the taxpayer may be able to appeal the decision, but they will not have any other legal recourse against the IRS.
If the IRS denies an OIC offer they will send written notification to the taxpayer identifying the reason for the denial. If the IRS determines the OIC offer is too low, they may be willing to provide a counter offer or negotiate with the taxpayer to find an offer which is agreeable to both the government and the Hawaiian taxpayer. If the IRS does not provide Offer in Compromise information to the taxpayer this information can be requested under the Freedom of Information Act.
Appealing an Offer in Compromise in Hawaii
Informal negotiations can often be done by contacting the IRS administrator who made the first OIC denial decision. If a taxpayer wants to make a more formal appeal they will need to send written notice to the IRS within thirty-days from the date of the OIC denial letter.
The formal written request for an OIC appeal must have the following information:
- Social Security number, telephone number, name and address
- A statement that the taxpayer is appealing the IRS ruling to the Appeal’s office.
- A copy of the letter sent to the taxpayer and the taxpayer’s proposed changes or items that the taxpayer wants changed and what the taxpayer does not agree with and why.
- Document the tax periods or years in question.
- Identify any tax laws or other authorities which may support the position.
- Identify any facts that may support the position with which the taxpayer disagrees.
- The taxpayer must sign the written protest under penalty of perjury.
Hawaiian taxpayers may represent themselves for all OIC appeals, but taxpayers may want to talk to a tax professional such as a tax attorney, certified public accountant or enrolled agent who can answer OIC questions.
Completing an Offer in Compromise
Hawaiian taxpayers must complete the following tasks:
- Hawaiian taxpayers must complete all OIC forms and submit them to the Internal Revenue Service.
- Hawaiian taxpayers must submit all requested financial data to the Internal Revenue Service. Financial information includes: taxpayer’s pay stubs, banking and car information.
- Hawaiian taxpayers must complete and send all federal tax returns to the Internal Revenue Service on or before the federal tax deadline for the next five years.
- All self-employed Hawaiian taxpayers must pay their estimated IRS taxes and submit their federal tax returns every quarter.
- All tax payments (except the amount outlined in the OIC agreement) must be paid by Hawaiian taxpayers for the next five years.
- Hawaiian taxpayers must pay the amount outlined in the Offer in Compromise agreement.
- The IRS will apply any federal tax refund to the Hawaiian taxpayer’s tax debt for the calendar year that the OIC is approved.
The IRS has the authority to terminate an Offer in Compromise if all the terms and conditions of the agreement are not met. If the Offer in Compromise is terminated, the IRS can charge the taxpayer the original amount of tax debt.
Offer in Compromise Forms
- IRS Form 656- Offer in Compromise. Hawaiian taxpayers must submit IRS Form 656 to the Internal Revenue Service to provide detailed financial information about the taxpayer and 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 additional information about the Hawaiian taxpayer and their ability to pay their federal tax debt.
- IRS Form 443-B- Collection Information Statement for Businesses. Hawaiian taxpayers will need to submit IRS Form 433-B to the Internal Revenue Service if a taxpayer’s business tax debt is included in the Offer in Compromise.
- IRS Form 656-A- Income Certification for Offer in Compromise Application Fee and Payment. Hawaiian taxpayers who request an Offer in Compromise fee waiver must submit Form 565-A.