Dealing with tax debt can be overwhelming, especially when you’re facing financial hardship. For many New Yorkers, an IRS Offer in Compromise (OIC) can provide a lifeline to resolve their tax issues. This program allows qualified taxpayers to resolve their tax debt for less than the full amount they owe.
While it can be a potential solution, the OIC process can be complex and time-consuming. This guide will walk you through the 10 essential steps to negotiate an IRS Offer in Compromise in New York, helping you understand the process and increase your chances of success.
What Is an IRS Offer in Compromise?
An IRS Offer in Compromise (OIC) is a program that lets eligible taxpayers settle their IRS debt for a lower amount than they owe. It’s meant to help individuals and businesses who are unable to pay their full tax liability or for whom doing so would create financial hardship.
The OIC program is not a quick fix or an easy way out of tax debt. It’s a complex process that requires careful preparation and negotiation. The IRS thoroughly reviews each application, considering the taxpayer’s ability to pay, income, expenses, and asset equity.
There are three grounds on which the IRS may accept an OIC:
- Doubt as to collectibility: When the taxpayer’s assets and income are less than the full amount of the tax liability
- Doubt as to liability: When there’s a genuine dispute as to the existence or amount of the correct tax debt under the law
- Effective tax administration: When there’s no doubt about the tax owed and the full amount that could be collected, but paying it in full would either create a financial hardship for the taxpayer or would be unfair to the taxpayer due to exceptional circumstances.
It’s important to note that the IRS won’t accept an OIC if they believe the taxpayer can pay their tax debt through an installment agreement or other means. Therefore, the OIC is typically a last resort for taxpayers who do not have other payment options.
How to Apply for an IRS Offer in Compromise (OIC)
Here are the steps in the OIC application process:
Step 1: Determine Your Eligibility
The IRS has specific criteria on who can be eligible to make an Offer in Compromise:
- You must be current with all tax filing requirements.
- You cannot be in an open bankruptcy proceeding.
- You must have made all required estimated tax payments for the current year.
- If you’re a business owner with employees, you must have made all required federal tax deposits for the current quarter.
Additionally, the IRS will consider your ability to pay, income, expenses, and asset equity. They use this information to calculate your “reasonable collection potential” (RCP), which is a key factor in determining whether your offer will be accepted.
Note that the IRS won’t consider an OIC if they believe you can pay your tax debt in full through an installment agreement or a lump sum payment. Therefore, you’ll need to demonstrate that paying the full amount would cause significant financial hardship.
Step 2: Gather Financial Documentation
Once you’ve determined your eligibility, the next step is to gather comprehensive financial documentation. This step is critical, as the IRS will scrutinize your financial situation to evaluate your offer. You’ll need to collect:
- Bank statements for the past three to six months
- Pay stubs or proof of income for the last three months
- Documentation of all assets including real estate, vehicles, and investments
- A list of all debts and monthly expenses
- Tax returns for the past three years.
Be thorough and accurate in your documentation. Any inconsistencies or omissions could result in your offer being rejected or delayed.
Step 3: Calculate Your Offer Amount
Determining the right offer amount is crucial to your OIC’s success. The IRS uses a formula to calculate the minimum offer they’ll accept:
(Monthly Disposable Income x 12 or 24) + Equity Value of Assets = Minimum Offer Amount
The multiplier (12 or 24) depends on your chosen payment option. For lump-sum cash offers, it’s 12; for periodic payment offers, it’s 24.
Remember, this is the minimum amount. Offering slightly more can increase your chances of acceptance. However, be realistic about what you can afford to pay.
Step 4: Choose Your Payment Option
The IRS offers two payment options for an Offer in Compromise:
- Lump sum cash: You pay 20% of the offer amount with your application and the remainder in five or fewer payments within five months of acceptance.
- Periodic payment: You submit your first proposed monthly payment with your application and continue making payments while the IRS considers your offer. If accepted, you’ll have up to 24 months to pay the full amount.
Each option has its pros and cons. The lump sum option often results in a lower total payment, but requires more upfront. The periodic payment option allows for smaller payments over time but may result in a higher total amount.
Step 5: Complete Form 656 and Form 433 (OIC)
To submit your Offer in Compromise, you’ll need to complete two primary forms:
- Form 656: Offer in Compromise
- Form 433-A (for individuals) or Form 433-B (for businesses).
Form 656 is where you’ll propose your offer amount and payment terms. Form 433 is a detailed financial statement where you’ll provide information about your income, expenses, assets, and liabilities.
Be meticulous when filling out these forms. Any errors or omissions can result in your offer being returned without consideration. Contact your attorney and make sure that every step in the process is correct.
Step 6: Write a Compelling Statement
While not required, including a statement explaining your circumstances can strengthen your case. This is your opportunity to provide context for your financial situation and explain why the IRS should accept your offer.
Your statement should address:
- Why you’re unable to pay the full amount
- Any special circumstances (such as medical issues or job loss)
- How accepting your offer is in the best interest of the government.
Be honest, concise, and factual in your statement. Avoid emotional appeals and focus on presenting a clear, logical case for why your offer should be accepted.
Step 7: Submit Your Application
Once you’ve completed all the necessary forms and gathered your documentation, it’s time to submit your application. You’ll need to include:
- Form 656
- Form 433-A or 433-B
- All required financial documentation
- Your initial payment (20% for lump sum offers or your first monthly payment for periodic payment offers)
- A $205 application fee (unless you qualify for a Low-Income Certification).
Double-check everything before sending. Missing information or incorrect payments can result in your offer being returned without consideration.
Step 8: Respond Promptly to IRS Inquiries
After submitting your offer, the IRS will assign an examiner to review your case. This process can take several months. During this time, the examiner may request additional information or clarification.
It’s crucial to respond promptly and thoroughly to any IRS inquiries. Delays in responding can lead to your offer being rejected. If you need more time to gather information, communicate with the examiner and request an extension.
Step 9: Consider Appeals if Necessary
If your offer is rejected, don’t lose hope. You have the right to appeal the decision within 30 days. The appeals process involves:
- Reviewing the rejection letter to understand why your offer was denied
- Gathering any additional information that might strengthen your case
- Submitting Form 13711: Request for Appeal of Offer in Compromise.
The appeals process can be complex, and it’s often beneficial to seek professional help at this stage.
Step 10: Comply with OIC Terms
If your offer is accepted, congratulations! However, your work isn’t done. To keep your OIC agreement in good standing, you must:
- Pay the agreed amount according to the terms of your offer.
- File all required tax returns on time for the next five years.
- Pay all required taxes on time for the next five years.
Failing to meet these terms can result in your OIC being defaulted, and the original tax debt being reinstated.
Seek Professional Help
Navigating the Offer in Compromise process can be challenging, especially if you’re dealing with complex financial situations or multiple years of tax debt. Consider seeking help from a tax professional experienced in OIC negotiations.
At John D’Amato PLLC, we concentrate on helping New Yorkers resolve their tax issues through Offers in Compromise and other tax resolution strategies. Mr. D’Amato is an experienced tax attorney who can guide you through each step of the process, from determining your eligibility to negotiating with the IRS on your behalf.
Don’t let tax debt overwhelm you. Take the first step towards financial freedom by calling us at (716) 703-9099 for a consultation.
FAQ: 10 Steps to Negotiate an IRS Offer in Compromise in New York
How long does the Offer in Compromise process typically take in New York?
The Offer in Compromise process can be lengthy, and the timeline can vary significantly depending on the complexity of your case and the current workload of the IRS. In New York, as in other states, you can generally expect the process to take anywhere from six months to two years from the time you submit your application.
Here’s a general breakdown of the timeline:
- Initial Processing: 4-6 weeks
After you submit your OIC application, it takes about four to six weeks for the IRS to process it and assign it to an examiner - Investigation: 3-6 months (or more)
The assigned examiner will review your application, financial information, and supporting documents. They may request additional information during this time. The complexity of your financial situation can significantly impact the length of this phase. - Decision: 1-3 months
Once the investigation is complete, the examiner will make a recommendation to accept or reject your offer. This decision then goes through a review process - Appeals (if necessary): 3-6 months
If your offer is rejected and you choose to appeal, this can add several more months to the process.
It’s important to note that during this entire process, the 10-year statute of limitations for collecting the tax debt is suspended. Additionally, if you’ve chosen the periodic payment option, you must continue making the proposed payments throughout the consideration period.
Factors that can extend the timeline include:
- Incomplete or inaccurate information in your application
- Slow response times to IRS requests for additional information
- Complex financial situations that require more thorough investigation
- High volume of OIC applications at the IRS.
To help expedite the process, ensure your application is complete and accurate, respond promptly to any IRS inquiries, and work with a tax professional who is experienced in OIC negotiations. At John D’Amato PLLC, we strive to make the process as smooth and efficient as possible for our clients, leveraging our experience to anticipate potential issues and address them proactively.
What are the chances of getting an Offer in Compromise accepted in New York?
The acceptance rate for Offers in Compromise can vary, but generally, it’s relatively low. Based on IRS data, the overall acceptance rate for OICs nationwide was about 42% in 2023, but over the years, we’ve seen it typically hovers around 30% to 40%. Note that these statistics include all submitted offers, including those that may not have been properly prepared or where the taxpayer didn’t meet the basic eligibility criteria.
In New York, the chances of acceptance can be influenced by several factors:
- Proper preparation: Well-prepared offers that accurately reflect the taxpayer’s financial situation and ability to pay have a higher chance of acceptance. This is where professional help can significantly improve your odds.
- Reasonable offer amount: The IRS is more likely to accept offers that closely align with their calculated reasonable collection potential.
- Financial hardship: If you can demonstrate genuine financial hardship, your chances of acceptance may increase.
- Compliance with tax laws: Being current with all tax filings and required estimated tax payments is crucial for OIC acceptance.
- Quality of supporting documentation: Providing thorough and accurate financial documentation strengthens your case.
- New York’s cost of living: The high cost of living in many parts of New York can impact the IRS’s calculation of your reasonable collection potential, potentially increasing your chances of acceptance if this cost of living significantly affects your ability to pay.
Working with an experienced tax professional can significantly improve your chances of acceptance. In New York, reach out to John D’Amato, PLLC. We have a track record of successful OIC negotiations as we understand what the IRS is looking for and can help present your case in the most favorable light.
Remember, even if your offer is initially rejected, you have the right to appeal. Many offers that are initially rejected are later accepted on appeal, especially with professional representation.
While the overall statistics might seem discouraging, don’t let them deter you if you believe an OIC is your best option. With proper preparation and representation, your individual chances of acceptance could be much higher than the average.
Can I negotiate an Offer in Compromise on my own, or should I hire a professional?
While it’s possible to negotiate an Offer in Compromise on your own, hiring a professional can significantly increase your chances of success and potentially save you money in the long run. Here are some factors to consider:
Pros of DIY Approach:
- Cost savings on professional fees
- Direct control over the process
- Potential for a sense of accomplishment.
Cons of DIY Approach:
- Complex paperwork and calculations
- Lack of expertise in IRS procedures and negotiation tactics
- Higher risk of errors that could lead to rejection.
An OIC is not the same as negotiating a purchase or a bargain. It will not be a good idea to submit documents with a “number” that you think is reasonable. A number of offers may be turned down for these reasons:
- You gave the taxing authority misleading information.
- You made a ridiculous compromise offer.
- Not all of your financial information was disclosed.
- You made an incorrect offer.
Get Help With Your IRS Offer in Compromise. Talk to Experienced New York Tax Attorney John D’Amato.
Don’t let tax debt, foreclosure threats, or overwhelming financial burdens control your life any longer. With nearly three decades of experience in bankruptcy, IRS solutions, and foreclosure defense, John D’Amato is ready to guide you towards financial stability and peace of mind. Our personalized approach ensures that you receive the attention and expertise your unique situation deserves.
Call us at (716) 703-9099 for a free, confidential consultation. Let us help you navigate the complexities of tax law and debt relief, providing you with the fresh start you deserve.