IRS Offers in Compromise / Fresh Start Program
If you owe back taxes you can’t afford to pay, it can seem that your tax debt is a hopeless situation and that you are doomed to suffer harsh penalties from the IRS.
Fortunately, the IRS offers options to those taxpayers who are unable to pay their tax debt. One such program, the Fresh Start Program, can help you pay off your tax debt while avoiding IRS actions such as wage garnishment, tax liens, seizure of your property, and even criminal charges.
Most Self-Prepared OIC Applications Are Denied
An OIC is completely dependent upon the taxpayer’s ability, or inability, to pay back their taxes. Because of the complexity of the qualifying requirements—and because the majority of OIC applications that are self-prepared are done incorrectly—the majority of applications are denied. Few taxpayers are familiar with the complex formulas used to calculate the qualifications for an OIC, such as allowable expenses, expenses based on geographical location, and income and asset allocation. The result is a 95-percent decline rate in self-prepared applications.
Key Tax Group can help you get an OIC
Why choose Key Tax Group? We are an experienced tax law firm that specializes in tax debt resolution. We proudly serve more than 3,000 clients each year and have resolved more than $175 million in tax debt. We are also accredited by the Better Business Bureau and our services have been awarded an A grade.
To take advantage of an OIC and increase the likelihood that you will ultimately qualify for the program, consulting with a tax professional is essential. At Key Tax Group, we will determine if you potentially qualify for an OIC by conducting a comprehensive financial interview with you and identifying the documents needed in order to give you the strongest chance for approval. Our job is simple: prevent aggressive collection activities and prevent the taxing authorities from upending your world financially by keeping them out of your bank accounts and away from your paychecks.
Additional programs offered through the Fresh Start program
Installment agreements: An installment agreement is a payment plan based on financials. Individual taxpayers owing up to $50,000 may be able to make monthly direct debit payments for up to 72 months without a financial statement, while those who need installment agreements for debts above $50,000 and more than six years to pay do need to provide a financial statement.
If your debt is under $50,000, we will set up an installment agreement that pays the debt off within 72 months. Since the payments are run through direct debit, we can ensure that a tax lien is not filed. If a tax lien already exists, then after 4 consecutive payments have been made we can petition for a tax lien removal. This is critical to the health of your credit.
Installment agreements must be carefully prepared or else the taxpayer risks the amounts being unreasonable and expensive to the point of almost unaffordable. As with any request to the IRS for any type of tax debt resolution, the help of experienced tax professionals is critical to reaching an acceptable resolution.
Tax liens: In most cases, taxpayers can owe $10,000 before receiving a Notice of Federal Tax Lien from the IRS. When certain conditions are met, including paying off their tax debt, the IRS may withdraw the filed notice. Taxpayers may also qualify to have the notice withdrawn if they are paying off their debt through the direct debit installment agreement described above.
OIC / Fresh Start Program FAQs
The Internal Revenue Service (IRS) Fresh Start program was designed to make paying back taxes or avoiding tax liens easier for American taxpayers. The program provides this through the Offer in Compromise (OIC), which is an agreement between the taxpayer and the IRS that settles a taxpayer’s tax liabilities for less than the full amount owed.
The IRS has a debt forgiveness program that means the IRS can’t collect back taxes if it would force someone into a financial crisis. So, if you qualify, you may have part of your tax debt forgiven, which means you would no longer owe the forgiven part of the debt. Your current financial situation is carefully examined to see if you qualify and, if so, to what degree.
An offer in compromise through the IRS Fresh Start program allows some taxpayers to settle their debts for a lesser amount than what they owe.
Here’s how it works:
When you submit an application for an offer in compromise, you provide the IRS with a dollar amount that you feel you can afford to pay each month. In addition to the application, you must submit a non-refundable $186 application fee and a non-refundable initial lump sum payment equal to 20% of the total amount owed (unless you qualify under the low-income certification guidelines to have both the fee and initial payment waived).
When considering whether to accept your offer (the monthly amount you suggested in your application and the timeframe for repayment), the IRS will review these factors and others:
- Your ability to pay
- Your income
- If you are offering to pay back your debt in five months or less, the IRS will look at one year of your projected future income
- Taxpayers who propose a payback period of six to 24 months will have two years’ worth of projected future income considered
- Your assets
- Your expenses
- Other relevant factors
When calculating a reasonable payback amount and timeframe for your situation, the IRS will determine a living expense amount, which is money that the IRS assumes cannot go towards paying back your tax debt. The living expense amount can include a broad range of expenses, such as:
- Credit card payments
- Minimum payments on student loans (if the loans are guaranteed by the federal government)
- Bank fees and charges
- Other expenses
If, after considering the totality of your financial circumstances, the IRS determines that your offer is the largest amount that you can reasonably afford within a certain timeframe, generally the IRS will accept your offer in compromise.
If, however, the IRS determines that you are able to pay the full amount of taxes owed—either in a lump sum or through a payment plan—or you can pay more than the amount that you have submitted, generally it will deny your offer in compromise. If your offer is rejected, you have 30 days to appeal the decision.
Once your offer is accepted by the IRS, you will be notified in writing and will need to pay the remaining balance in five payments or less.
You also have the option of making payments to the IRS while your offer is being considered. If it is accepted, you would then continue to make payments on the balance normally.
It is important to note that while your offer is being considered by the IRS, it is possible that a Federal tax lien will be filed against you; however, collection actions will be suspended until the offer in compromise determination is complete.
There are three types of offers in compromise that may be available to you:
- Doubt as to Collectibility
- Doubt as to Liability
- Effective Tax Administration
The most common type of offer in compromise is the Doubt as to Collectibility. Taxpayers who owe back taxes that couldn’t be paid with an installment plan before the time period to collect expires (typically 10 years from the time of assessment) or even if the individual sold all of their assets, will qualify for this type of offer in compromise. The applicant will determine what their ability to pay is and offer that amount to the IRS as a settlement on the total debt.
If you dispute the amount of taxes that you owe, you can apply for a Doubt as to Liability offer in compromise. To qualify, you must have a legitimate and documentable reason that shows you do not owe the tax debt attributed to you. Auditors will evaluate your application and the supporting documentation you have submitted to determine whether to accept or reject your offer.
In the case of exceptional circumstances—usually, when the payment of the taxes due would create an economic hardship on the taxpayer—the IRS has the discretion to settle your bill through an Effective Tax Administration.
If you fail to either file your tax return or an extension, the IRS will assess a failure-to-file penalty in the amount of 5% of your unpaid taxes every month.
If you file your tax return but don’t pay the amount of taxes owed, the IRS will assess a failure-to-pay penalty in addition to the interest charged on the unpaid tax amount.
If you continue to fail to file your taxes or an extension, or fail to pay the taxes you owe, the IRS has serious penalties they can use against you, including:
- Wage garnishment
- Levies against your bank and other accounts
- Federal tax liens upon your property
- Seizure of your property
In severe situations, the IRS can even charge you with tax evasion and revoke your passport.
Effective March 27, 2017, the IRS will not review any new OIC applications for people who have not filed all their tax returns, unless it is the current year’s tax returns and you’ve filed a valid extension.
Unfortunately, if you are involved in a bankruptcy proceeding you are ineligible to participate in the Fresh Start program.
The qualifications are based on your family size, household income, and where you live. Your gross monthly household income must be less than or equal to the amount on IRS Form 656, Section 1, that corresponds with your family size and your location.
Yes, if the offer is accepted and the amount has been paid in full.
Maybe. The IRS isn’t required to release a levy that was put into place before you submitted your offer. Depending on the unique circumstances of your case, the IRS may be able to remove the levy if it was started after your OIC was received.
If you disagree with the valuation of your ability to pay, you have several options. First, you can provide additional documentation to show that the payment amount is inaccurate. Second, you can request a telephone conference with an employee to discuss your dispute. Also, some cases may qualify for Fast Track Mediation.
If you have a preference of which tax debt you would like to pay first, you can let the IRS know in writing either when the offer is made or when you make a payment. Absent a written preference, the IRS will apply the payment in whatever way is in the best interest of the government.
An OIC rejection decision can be appealed within 30 days of receiving the rejection letter by following the instructions contained in the letter. If you do not wish to appeal, then you would either pay the tax debt in full or request an installment agreement so that you can make periodic payments on your tax debt.
If the taxpayer defaults on the OIC, the IRS will reinstate the tax debt minus whatever payments have already been received.
Contact Key Tax Group For Tax Relief Solutions
Why choose Key Tax Group? We are an experienced tax law firm that specializes in only tax resolution. We proudly serve over 3,000 clients each year and have resolved more than $175 million in tax debt. We are also accredited by the Better Business Bureau and our services have been awarded an ‘A’ grade.
If you are having difficulty with tax debt or would like to learn more about Offers in Compromise, please contact us today for a free initial consultation with one of our tax professionals.