1.5 IRS Procedures: Collection Procedural Questions
What is an Offer in Compromise?
An offer in compromise (OIC) is an agreement between a taxpayer and the
Internal Revenue Service (IRS) that resolves the taxpayer's tax liability.
The IRS has the authority to settle, or compromise, federal tax liabilities
by accepting less than a full payment under certain circumstances. The IRS
may legally compromise for one of the following reasons:
Doubt as to Liability: Doubt exists that the assessed
tax is correct.
Doubt as to Collectibility: Doubt exists that the
taxpayer could ever pay the full amount of tax owed. The minimum offer amount
must generally be equal to (or greater than) the taxpayer's reasonable collection
potential (RCP). The RCP is defined as the total of the taxpayer's realizable
value in real and personal assets, plus his/her future income.
Note: Unless the taxpayer files an OIC claiming special
circumstances, the offered amount must equal or exceed the reasonable collection
potential. Realizable value is the asset's quick sale value (amount which
could be reasonably expected through the sale of the asset) minus what the
taxpayer owes to a secured creditor.
Effective Tax Administration: There is no doubt that
the tax is correct and no doubt that the amount owed could be collected in
full, but exceptional circumstances exist such that collection of the full
amount would create economic hardship or where compelling public policy or
equity considerations provide sufficient basis for compromise. The taxpayer
bears the burden of proof to show their OIC qualifies for public policy or
equity considerations. They must show that their circumstances are compelling
enough to justify acceptance of their OIC compared to other taxpayers in similar
circumstances.
For additional subjects on Offer in Compromise see Offer
in Compromise.
What are the requirements for an OIC?
In order to be considered for an OIC, a taxpayer must meet all of the following
requirements:
Used the most current versions of Form 656, "Offer in Compromise," and
Forms 433-A and 433-B, "Collection Information Statements." The most current
versions are dated May 2001;
Submitted the $150 application fee, or Form 656-A, "Income Certification
for Offer in Compromise Application Fee," with the Form 656 (effective 11/01/03);
Filed all required federal tax returns;
Filed and paid any required employment tax returns on time for the two
quarters prior to filing the OIC, and is current with deposits for the quarter
in which the offer in compromise was submitted; and
is not a debtor in a bankruptcy case.
Taxpayers must comply with all federal tax filing and paying requirements
for a period of five years following acceptance of their OIC, or until the
OIC is paid in full, whichever is longer. This also includes making required
estimated tax payments and federal tax deposits.
For additional topics onOffer in Compromise see Offer
in Compromise.
How do I complete an OIC
First obtain a Form 656 (PDF), Offer in Compromise
Package (Revised 5/2001. The package includes information and instructions
for completing the form, as well as a worksheet that can be used to calculate
an amount to offer. Form 433-A (PDF) , Collection
Information Statement for Wage Earners and Self-Employed Individuals,
and Form 433-B (PDF) , Collection Information
Statement for Businesses (Revised 5/2001), are included in the Form 656
package and may need to be completed as well depending upon individual situation.
Taxpayers will need to review and include amounts for items such as housing
and utilities from the Collection
Financial Standards, and Necessary
Expenses, to complete their collection information statements (s).
NOTE: For corporations and partnerships, Form 433-A
may be requested from corporate officers and individual partners.
References:
I am unable to pay my delinquent taxes. Will the IRS accept an Offer
in Compromise?
You may qualify for an Offer in Compromise if you are unable to pay your
taxes in full or if you are facing severe or unusual economic hardship. Refer
to Tax Topic 204, Offers in Compromise, for additional information.
References:
Is there any special assistance available on unresolved tax matters
which are creating a hardship?
If you are suffering, or about to suffer a significant hardship because
of the way Internal Revenue laws are being carried out, you may ask for special
help from the IRS' Taxpayer Advocate Program. The Taxpayer Advocate represents
your interests and concerns within the IRS by protecting your rights and resolving
problems that have not been fixed through normal channels. You can reach that
office by dialing (877) 777-4778.
References:
- Tax Topic 104, Taxpayer Advocate Service - help for
problem situations
I owe money this year. Who do I make the check out to?
When you pay by check or money order, make it out to the "United States
Treasury." Please show your correct name, address, social security number,
daytime telephone number, and the tax year and form number on the front of
your check or money order. Double check to make sure that you have printed
your social security number correctly and that it matches the one used on
your income tax return.
Enclose your payment with your return, but do not attach it to the form.
If you received Form 1040-V, Payment Voucher, use it to send your payment
to the IRS. This will help us process your payment more accurately and efficiently.
Follow the instructions that come with the form.
You can also pay part or all of your tax by using a credit card (American
Express Card®, Discover Card®, Master Card®, or Visa® card).
Payments can be made by phone or Internet. There are two credit card processors
(also referred to as service providers), which offer this service. Service
providers charge you a convenience fee for the service.
References:
Can I ask to make installment payments on the amount I owe?
Yes. If you cannot pay the full amount due as shown on your return, you
can ask to make monthly installment payments. However, you will be charged
a one time user fee of $43.00, and you can be charged a late payment penalty
unless you can show reasonable cause for not paying the tax by April 15, even
if your request to pay in installments is granted. Before requesting an installment
agreement, you should consider less costly alternatives such as a bank loan.
To request an installment agreement, send Form 9465 (PDF), Installment Agreement Request with your return or call
(800) 829-1040. You should receive a response within 30 days. For more details
on installment payments, refer to Tax Topic 202, What to do if You
Can't Pay Your Tax, or Publication 594 (PDF), Understanding
the Collection Process.
References:
I just completed my return and find that I owe the IRS money. What
should I do?
You should file your return even if you can't pay the entire amount you
owe. File by the due date of the tax return and pay as much as possible. By
filing on time, you avoid the late filing penalty. By paying as much of the
amount you owe, you reduce the amount of interest and late payment penalty
that you will owe. If you are unable to pay the full amount of your balance,
you can request an installment agreement to pay the amount due with Form 9465 (PDF) or calling (800) 829-1040. For more details
on interest and penalties, refer to Tax Topic 201, The Collection
Process, or Publication 594 (PDF), Understanding
the Collection Process.
References:
What kind of penalties and interest will I be charged for paying
and filing my taxes late?
Interest, compounded daily, is charged on any unpaid tax from the due date
of the return until the date of payment. The interest rate is the federal
short-term rate plus 3 percent. That rate is determined every three months.
For current interest rates, go to News
Releases and Fact Sheets and find the most recent Internal Revenue release
entitled Quarterly Interest Rates.
In addition, if you filed on time but didn't pay on time, you'll generally
have to pay a late payment penalty of one-half of one percent of the tax owed
for each month, or part of a month, that the tax remains unpaid after the
due date, not exceeding 25 percent. However, you will not have to pay the
penalty if you can show reasonable cause for the failure. The one-half of
one percent rate increases to one percent if the tax remains unpaid after
several bills have been sent to you and the IRS issues a notice of intent
to levy.
Beginning January 1, 2000, if you filed a timely return and are paying
your tax pursuant to an installment agreement, the penalty is one-quarter
of one percent for each month, or part of a month, that the installment agreement
is in effect.
If you did not file on time and owe tax, you may owe an additional penalty
for failure to file unless you can show reasonable cause. The combined penalty
is 5 percent (4.5% late filing, 0.5% late payment) for each month, or part
of a month, that your return was late, up to 25%. The late filing penalty
applies to the net amount due, which is the tax shown on your return and any
additional tax found to be due, as reduced by any credits for withholding
and estimated tax and any timely payments made with the return. After five
months, if you still have not paid, the 0.5% failure-to-pay penalty continues
to run, up to 25%, until the tax is paid. Thus, the total penalty for failure
to file and pay can be 47.5% (22.5% late filing, 25% late payment) of the
tax owed. Also, if your return was over 60 days late, the minimum failure-to-file
penalty is the smaller of $100 or 100% of the tax required to be shown on
the return.
Also, refer to Tax Topic 653, IRS Notices and Bills and Penalty
and Interest Charges.
References:
I received an IRS bill for an amended return I filed. I am not able
to pay the whole amount at this time. Will the IRS allow me to make monthly
payments?
If you cannot pay the full amount due, you can ask to make monthly installment
payments. You can be charged a fee for this arrangement. Penalties and interest
will continue to accrue on the unpaid amount until the account balance is
paid in full. Refer to Tax Topic 202, What to Do if You Can't Pay
Your Tax, for more information.
References:
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