Most recently, advertisements in radio and television filled the air with claims that taxpayers with outstanding balances with the International Revenue Service (IRS) can now settle their tax obligations through a settlement program known as the IRS Offer in Compromise (OIC). Taxpayers who are unable to pay their taxes can inquire about the program at the nearest IRS office. However, IRS Statistics have shown that many taxpayers will not be able to avail of the OIC.
The tax due the government continues to increase as reported by the Government Accountability Office these past years. Statistics have shown that in 2010, around 16 million taxpayers were in default to the IRS. Of this number, only a small portion – 31,000 – were approved by the IRS for tax restructuring in 2013. The figures also show that on the same year, the IRS inked 4 million tax installment agreements for repayment of back taxes. But the payment rate was dismal.
OIC as Option to Settle Tax Payments
The OIC is harder to extend as compared to other programs due to two main reasons. First, is the inability of the taxpayer to qualify for OIC, and; second, the taxpayer may not have the capacity to pay the offered amount, even if he qualifies. The question now arises on how does a taxpayer qualify? The computation is not subjective. It is based on ones’ ability to pay his taxes before the time the IRS declares it as a debt – or otherwise known as a collection status registration date.
The OIC computation is based on a formula that uses an OIC Pre-Qualified Tool. An applicant must prove that he has no means to pay the IRS, by way of his equity and/or future income. The IRS then computes any determinable future earnings to come up with the monthly payment prior to the expiration of the collection period. Nonetheless, though the formula is seen as objective, arguments were seen to arise in the computation of disposable income and future earnings. But once the figure is derived, the taxpayer merely faces two options. If he cannot pay the amount owed, he qualifies as OIC; if he can pay, then he does not qualify.
Nonetheless, qualifying for an OIC does not automatically translate to obtaining an OIC. To obtain the OIC, the taxpayer must be able to pay the offered amount, which is the amount required to pay the IRS to pay the tax obligation. The offered amount can be paid within 12 or 24 months based on future income, as compared to the payment of the full amount that the IRS can impose before the expiration of the collection statute.
Payment of the OIC Offered Amount
To compute for the offered amount, it is necessary to exercise caution in the calculations. Any mistake could lead to a long and costly investigation when there might be a better alternative to consider like an installment agreement in lieu to an OIC. Taxpayers sometimes encounter errors in computing their equities vis-a-vis total assets, or their monthly disposable income – resulting to a much larger offered amount than they can barely afford to pay. Hence, utmost care and diligence should be exercised in computing the OIC’s financial components, so the rights decision can be made.