Kentucky taxpayers who owe IRS back taxes may have the opportunity to settle their tax debt for a fraction of the total amount owed with an IRS tax settlement option. The most common plan available is Offer in Compromise or OIC. OIC allows a Kentucky taxpayer to make an “offer” to the Internal Revenue Service (IRS) outlining an amount of money they can pay. The IRS can either accept or reject the OIC offer. If the IRS accepts the offer it is considered a “comprise” and after meeting the terms of the Offer in Compromise, the Kentucky taxpayer’s debt is settled.
The Internal Revenue Service will accept an Offer in Compromise to help position the Kentucky taxpayer to fulfill their future tax liability and hopefully avoid an extended installment agreement. The IRS not only has the authority to collect federal tax debt but also sole discretion to accept an OIC offer. The IRS accepts approximately 25% of OIC offers at the initial application level. More are accepted after negotiations and appeals. If the IRS rejects a Kentucky taxpayer’s offer, the taxpayer will not have legal recourse against the IRS and the IRS can use the detailed financial information they have collected to continue aggressive collections. Penalties and interest will also continue to accrue while the OIC offer is under consideration.
Kentucky residents who need information about Offer in Compromise can contact a tax professional. Offer in Compromise can be complicated, expensive and time consuming. Offer in Compromise is one of several tax settlement options available for taxpayers and may not be the best option for all Kentucky residents.
Qualifying for Offer in Compromise in Kentucky
Kentucky taxpayers who are considering Offer in Compromise must meet one of the following requirements:
Doubt as to Liability – Kentucky taxpayers who question the amount of tax debt they have been assessed may qualify for an Offer in Compromise. This condition is not frequently met.
Doubt as to Collectibility – The Internal Revenue Service may agree to an Offer in Compromise if there is some question about their ability to collect the debt or if the cost to collect the federal tax debt is too high.
Effective Tax Administration– Certain Kentucky residents may be granted an Offer in Compromise if paying their federal tax debt could cause an “economic hardship which would be inequitable or unfair”. This condition is most frequently accepted for the elderly and handicapped.
Rejection of Offer in Compromise in Kentucky
The Internal Revenue Service rejects approximately 80% of the Offer and Compromise offers it receives. Additional OIC offers are accepted after formal appeals and negotiations. The Internal Revenue Service must send written information about all OIC denials and if they consider the offer too low, the IRS should be willing to provide information about the amount they would accept. Kentucky residents who are appealing a denial must send a written letter to the IRS with in 30 days from the date of the denial letter. New Offer in Compromise forms will not need to be submitted unless the deadline has passed or the taxpayer’s financial information has substantially changed.
Appealing an Offer in Compromise in Kentucky
Kentucky residents may appeal an Offer in Compromise. Informal negotiations may be made by contacting the IRS administrator who made the first denial. The Internal Revenue Service may be willing to work with the Kentucky taxpayer to find an OIC amount which is acceptable to both parties. A more formal appeal can be made by writing a letter to the Internal Revenue Service within thirty days from the date of the Offer in Compromise denial letter.
Completing an Offer in Compromise
Kentucky taxpayers must complete the following tasks for an OIC:
- Taxpayers must submit Offer in Compromise forms and documents to the Internal Revenue Service. Documents may include: Kentucky taxpayer’s pay stubs, bank records, and vehicle information.
- The Internal Revenue Service federal tax returns must be filed on or before the federal tax deadline for the next five years.
- All self-employed Kentucky workers must submit estimated federal tax payments and file all federal tax returns each quarter.
- Kentucky taxpayers must pay federal tax payments (excluding the amount outlined in the OIC offer) for the next five years.
- Kentucky taxpayers must agree to pay the amount outlined in the OIC agreement.
- Kentucky taxpayers must agree to let the IRS keep all federal tax refunds and apply them to the tax debt prior to accepting the Offer in Compromise.
- The Internal Revenue Service will use all tax refunds to pay back taxes for the calendar year that the OIC is approved.
The Internal Revenue Service can legally revoke an Offer in Compromise and charge Kentucky taxpayers all of the taxes due for failing to meet the agreed upon terms of the Offer in Compromise.
Offer in Compromise Forms
- IRS Form 656- Offer in Compromise. IRS Form 656 will provide financial information to the IRS about the Kentucky taxpayer’s financial status and their ability to repay their federal tax debt.
- IRS Form 443 A- Collection Information Statement for Wage Earners and Self-Employed Individuals. Form 443-A provides additional financial information about the Kentucky taxpayer to the Internal Revenue Service about the taxpayer’s ability to pay their tax federal debt.
- IRS Form 443-B- Collection Information Statement for Businesses. Form 433-B provides information to the Internal Revenue service about the Kentucky taxpayer’s business. Form 433-B is only needed if the business tax debt is included in the Offer in Compromise.
- IRS Form 656-A- Income Certification for Offer in Compromise Application Fee and Payment. This form will only need to be submitted if the taxpayer is requesting a waiver for the Offer in Compromise.