The IRS does have the authority to write off all or some of your tax debt and settle for less than you owe through an offer in compromise (OIC). This can be a lifeline for those struggling with tax debt, but it’s important to know that OICs are rare.
With over 16 million individual taxpayers owing the IRS, only a small fraction get an OIC. Most people find better solutions through other IRS options like payment plans or “currently not collectible” status, where your allowable expenses exceed your monthly income. These alternatives can provide more realistic and attainable paths to managing your tax debt.To qualify for an OIC based on “doubt as to collectability,” you need to prove you can’t pay the full amount. This means demonstrating that your net equity in assets (home, 401(k), savings, investments, etc.) plus your monthly disposable income (income minus allowable living expenses) is less than your tax debt. The IRS uses specific rules to value your assets and determine allowable expenses, so be prepared to provide detailed financial information.
Understanding OICs can be tricky
Understanding an Offer in Compromise (OIC) can be challenging, but even if you qualify, it’s crucial to remember that you must be able to pay the required amount to settle your tax bill. This “offer amount” is often significantly influenced by the value of your assets. If you’ve built up equity in your home or have a substantial 401(k), you might need to pay the IRS the “net equity” from these assets as part of your offer amount.
Additionally, the offer amount encompasses what the IRS expects to receive in monthly payments over a designated period. This timeframe is determined by various factors, including the remaining time the IRS has to collect the debt and the payment method you choose for settling the offer amount. Understanding these details can help you better prepare for the financial commitment involved.
For many individuals, exploring alternatives like a payment plan or qualifying for hardship status might be more feasible and less financially draining. These options can provide a structured and manageable way to address your tax obligations without the immediate and significant financial impact that an OIC might require.
Conclusion
The IRS provides a useful tool called the OIC Qualifier tool to help you evaluate your eligibility for an Offer in Compromise (OIC). While this tool covers the basic qualification criteria, it doesn’t consider the many nuances involved in calculating the value of your assets, average monthly income, and expenses. This is where professional guidance becomes essential.
Engaging a tax expert, like those at Hawaii Tax Resolution Services of Hawaii, can be invaluable. They can thoroughly assess your assets, liabilities, income, and expenses to determine your eligibility for an OIC. If you qualify, they will help you calculate the appropriate offer amount and handle all communications with the IRS on your behalf. If you don’t qualify, these professionals can assist you in finding the right IRS payment agreement tailored to your situation.
Frequently Asked Questions
Q: Can back taxes be written off through bankruptcy?
A: In certain cases, back taxes can be discharged through bankruptcy, specifically Chapter 7 or Chapter 13. However, specific criteria must be met, such as the taxes being at least three years old, the tax returns filed at least two years ago, and the taxes assessed at least 240 days before filing for bankruptcy. Consulting a bankruptcy attorney is advisable to understand your specific situation.
Q: What is an Offer in Compromise (OIC) and can it help write off back taxes?
A: An Offer in Compromise (OIC) is a program offered by the IRS that allows qualified individuals to settle their tax debt for less than the full amount owed. If you qualify, it can help reduce your back taxes. However, eligibility criteria are stringent, and the IRS will consider your ability to pay, income, expenses, and asset equity.
Q: Are there any IRS programs other than OIC that can help with back taxes?
A: Yes, apart from the Offer in Compromise, the IRS offers other programs like Installment Agreements and Currently Not Collectible (CNC) status. Installment Agreements allow you to pay your back taxes over time, while CNC status temporarily halts collection efforts if you can’t pay due to financial hardship.
Q: Can back taxes be forgiven if I am experiencing financial hardship?
A: If you are experiencing significant financial hardship, you might qualify for Currently Not Collectible (CNC) status, which can temporarily halt IRS collection efforts. While this does not write off the taxes, it can provide relief until your financial situation improves. An OIC might also be an option for permanent resolution, depending on your circumstances.
Q: How does the statute of limitations affect back taxes?
A: The IRS generally has ten years from the date of assessment to collect unpaid taxes. After this period, the remaining balance may be written off, and you are no longer legally required to pay it. However, certain actions, like filing for bankruptcy or submitting an Offer in Compromise, can extend this period. It’s important to consult with a tax professional to understand how the statute of limitations applies to your situation.
