Tax debt is a heavy burden to bear. An oversight from the past or a clerical error can place significant strain on your current financial situation. Whether you owe a tax debt to the State of Indiana or the federal government, an offer in compromise (OIC) is one potential option to reduce the amount of tax you must pay. In this blog, a Fishers, Indiana OIC attorney answers common questions about offer in compromise programs at the state and federal level.
When considering options to reduce or eliminate your tax debt, please remember that there is no substitute for a consultation with an Indiana tax attorney to truly assess and determine the best path forward for your specific situation.
Asking the Right Questions about Offer in Compromise
If you are familiar with the option of submitting an offer in compromise to the Internal Revenue Service (IRS) or Indiana Department of Revenue (DOR), you probably have questions like these about the specifics of these agreements:
- Who can file an offer in compromise?
- How much does it cost to file an OIC?
- How much should I offer in compromise to the IRS?
- How long does offer in compromise take?
- How likely is an offer in compromise to be accepted?
These are all important questions about offer in compromise possibilities, and anyone considering applying to the IRS or Indiana DOR for tax relief of this kind should learn the answers. However, those only vaguely familiar with this form of tax relief should begin with the basics.
What Is an Offer in Compromise?
An offer in compromise is first a proposal that a taxpayer—either an individual or a business—makes to the IRS or a state tax department in an attempt to negotiate a settlement of tax liability for less than the amount owed. If the offer is accepted by the IRS or state tax entity, the OIC becomes a legal agreement with specific terms that must be upheld by both parties.
An Indianapolis Tax Attorney Answers Questions about Offer in Compromise
If you believe an offer in compromise could be the best way to settle your tax debt with the IRS or the Indiana DOR, the following questions and answers should be helpful. However, the information here should not be considered a substitute for legal counsel, and we strongly recommend that you consult with an experienced tax attorney.
Who Can File an Offer in Compromise?
The IRS has three conditions under which it will consider an offer in compromise:
- The taxpayer claims that the tax liability determined is in error;
- The collectability of the full amount is in doubt; or
- Paying the debt in full would be inequitable or create undue financial difficulty for the taxpayer.
In addition to meeting one of the requirements above, acceptance of an OIC by the IRS requires that current estimated taxes are paid and that the taxpayer has filed all necessary tax returns. Individuals and businesses that can pay the full debt owed through an installment plan will typically not be allowed to participate in an offer in compromise agreement.
How Much Does it Cost to file an OIC?
As of April 2020, the application fee for filing an offer of compromise with the IRS is $205. If you qualify for low income certification or are filing due to a dispute of the tax liability, the fee is not required.
In addition to the nonrefundable application fee, an initial payment of 20 percent of the proposed settlement amount or payment of the first installment is due at the time of application, depending upon the installment plan requested. This initial payment is applied to the tax debt and is not refundable, even if the offer in compromise is rejected.
Finally, to improve the prospect that your application and other preparation will be accurate and complete, you should also factor in the cost of an experienced Indianapolis tax attorney to assist throughout the process. An experienced OIC attorney can prevent this tax problem from looming.
How Much Should I Offer in Compromise to the IRS?
The IRS calculates ability to pay by evaluating the taxpayer’s income (including potential future income), expenses, and equity in assets. This results in a determination of the reasonable collection potential (RCP) of the debt. This calculation must be taken into account when determining how much you should offer in compromise to the IRS or the State of Indiana. If an offer is less than the RCP determined by the IRS, it is not likely to be accepted.
How long does Offer in Compromise take?
There is no standard timeframe for a decision on an offer in compromise, but you should expect the process to take around six months. You should hear from the IRS sooner to confirm your application status. If the IRS does not make a decision regarding your OIC application within two years of submission, the offer is approved automatically.
How Likely Is an Offer in Compromise to Be Accepted?
In 2019, the IRS accepted 17,890 of 54,225 applications for offer in compromise. Clearly, many people will not qualify for an offer in compromise to settle tax debt, either because the situation does not fall into one of the categories noted above or for other reasons.
Poorly prepared or incomplete applications are another possible reason for denial of an OIC request. If your application is rejected, you may appeal the decision within 30 days. In some cases, the IRS may return your application due to incomplete or insufficient information. If this happens to you, you may resubmit the application with corrections, but you do not have an option to appeal at that time.
Taxpayers filing an offer in compromise on the basis of a dispute regarding the amount or existence of tax liability are to use a different form to submit the application to the IRS than those filing under conditions related to collectability or inability to pay. There are also additional forms and attachments that must be included with the different OIC applications. For those in Hamilton County and the greater Indianapolis area, a Fishers, Indiana OIC attorney from Camden & Meridew, P.C. is an excellent resource to ensure your OIC paperwork is filed completely and correctly, whether you are indebted to the IRS or the State of Indiana.
Applying for an Offer in Compromise in Indiana
Not all states accept offers in compromise for settling state tax debt. However, Indiana is one of the states that does provide this option. To apply for an OIC in Indiana, the taxpayers must file one of the following with the Indiana Department of Revenue:
- Form FS-OIC and related documentation;
- A copy of your IRS OIC application and related documentation; or
- A copy of an approved IRS OIC and related documentation, the proof of the debt filed with the IRS, and the letter from the IRS approving the agreement.
Offers in compromise in Indiana are managed by the Taxpayer Advocate Office. The state has specific requirements for qualification and, like the IRS, will reject or return applications that do not meet the standards set or include all required information and documentation.
Consult an Indianapolis Tax Attorney for Answers to Questions about Offer in Compromise
If you are trying to determine the best way to address your state or federal tax liability and have questions about the offer in compromise route, Fishers, Indiana OIC attorney Julie A. Camden from Camden & Meridew, P.C. has the answers you need. She would be happy to discuss this and other options that can help you break free from your tax debt and move forward. Please reach out today by calling (317) 770-0000 or complete the firm’s online contact form to schedule a consultation.