If a taxpayer owes outstanding taxes to the IRS and can’t pay their full tax liability without a major financial hardship, they can file an Offer in Compromise to settle the debt. The Internal Revenue Service has the authority to settle or reduce the amount of taxes owed, depending on the individual’s tax situation.
If an individual taxpayer can demonstrate doubt as to collectability or that they deserve tax and penalty relief due to special circumstances that make paying the entire amount owed unfair, the IRS will stop collections and consider the offer in compromise. In many cases the IRS is often willing to accept an OIC if they consider the amount offered the most they can expect to collect in a reasonable amount of time.
Taxpayers must be current with all filing and payment requirements and must not be in an open bankruptcy proceeding to be eligible to file an OIC. The IRS website features an Offer in Compromise Pre-Qualifier for people to be able to confirm eligibility before filing. The IRS will evaluate a taxpayer’s ability to pay under an OIC by reviewing financial information from the taxpayer, submitted through the IRS financial statement, Form 433-A (OIC).
For individuals, the IRS allows personal living expenses such as housing, automobile, and health care costs in evaluating a taxpayer’s ability to pay. However, the IRS limits these expenses, so some taxpayers may not be able to include the entirety of their personal costs when filing an OIC. The IRS has long established local and national standards that set maximum allowances based on factors such as the taxpayer’s family size and location.
When filing an OIC, the taxpayer is permitted to claim the amount actually spent on personal expenses or the appropriate standard expense limit, whichever is less. What often occurs in this situation is a taxpayer with large personal expenses is allowed a smaller allowance due to the limits of their local area. This denotes more monthly income for that taxpayer, which will increase the OIC amount the IRS is willing to accept, or make the OIC unacceptable altogether.
Additionally, effective March 28, 2016, the IRS has updated their figures on allowable personal living expenses, which show a reduction in the monthly dollar amounts it will accept in an OIC. In many areas of the country, this makes qualifying for an Offer in Compromise more challenging, and for many taxpayers has increased the amount that must be offered under an OIC to settle their debts. Although OICs are still an important tool in settling tax debts with the IRS, the up-to-date expense tables make it vital to consult with a professional tax attorney in San Mateo County to determine whether an OIC is an appropriate option.
When considering which tax attorneys in San Mateo County to hire to help you with the Offer in Compromise process, remember that Tax Helpers has 19 years of outstanding results in helping clients reduce their tax debts! Give us a call today for a free consultation so we can help you get started!