When an individual or small business is saddled with an outstanding tax debt, there are several ways to handle the situation. If you owe a substantial amount and the statute of limitations is closing in, you could simply try to wait it out or you could make an Offer in Compromise. An Offer in Compromise is essentially a proposal for settling your tax debt for less than what’s owed. In 2013, nearly 42% of all offers were accepted, which means that a significant number of taxpayers were turned away. If you’ve attempted to negotiate a settlement with no success, here are the next steps you need to take.
Determine whether your offer was rejected or returned
When the IRS receives an Offer in Compromise, there are three possible outcomes: acceptance, rejection or return. If your offer is rejected, that means that the terms you proposed weren’t sufficient to merit an approval. When an offer is returned, it’s usually because there was either an error present on the necessary paperwork or the IRS has determined there is a risk of you incurring further tax liability in the near future.
If your offer was returned, your only options are to resubmit your Offer in Compromise application or deal with your debt outside of the Offer in Compromise process. There’s no penalty for resubmitting an Offer in Compromise with the correct information but you should keep in mind that it does slow the process down. On the other hand, if you received a formal rejection letter, you have another alternative in the form of an appeal.
Initiating the appeals process
Once you receive written notification from the IRS that your offer has been rejected, you have 30 days to initiate an appeal. Appeals may be submitted using Form 13711 or by writing a detailed letter that includes the following information:
- Your name, address, Social Security number and contact telephone
- A statement requesting an appeal of the IRS findings
- A copy of your rejection notice
- A statement outlining what you don’t agree with and why
- Supporting facts or additional information you would like to have considered
- Your signature and a statement attesting to the veracity of the information you’ve provided
Regardless of which form your request takes, you must return it to the IRS within the 30-day window. If you fail to do so, you forfeit your right to an appeal. In situations where you’re not sure your offer will be accepted on appeal, it can still be wise to request reconsideration on appeal since this will temporarily stay any further collection or enforcement actions against you.
What to expect at the appeal hearing
Due to the large volume of appeal requests the IRS receives, it may take up to 90 days to obtain a response. Once your case is assigned to an appeals officer, you’ll receive a date for your conference hearing where you should be prepared to make your case as to why your offer should be reconsidered. These hearings are usually held by phone. At the hearing, you’ll want to present any documents you have to support your claim, such as income statements, financial records related to your small business or any other evidence you believe is relevant.
While you’re not required to have legal representation at an appeals hearing, it’s something to consider if your case is relatively complicated or you’re concerned about making a potentially costly misstep. An attorney can also help you prepare a contingency plan if your appeal is denied.
When an appeal fails
If your appeal is unsuccessful, the possibility of facing a tax lien or garnishment of your bank account is more likely to become a reality. When either scenario occurs, it can create even more financial difficulty and cause harm to your credit. If you have very little assets or income to pay the tax debt, you could attempt to qualify for uncollectible status. While this doesn’t eliminate your liability, it temporarily prevents the IRS from levying your assets.
For taxpayers who have a steady income and no desire to be targeted by collection actions, an Installment Agreement is an attractive alternative. Generally, individuals who owe $50,000 or less in income tax and business owners who owe $25,000 or less in payroll taxes will qualify for an online or streamline payment plan. If you owe more than these amounts, you’ll need to complete Form 9465 and complete a financial statement before your plan is approved.
Depending on how much you owe, you’ll have between 3 and 6 six years to pay down your total balance due. Any future refunds you’re eligible to be receive will automatically be applied to the debt and you must file your taxes on time each year. If you pay more than 30 days late, your account will go into default and you’ll be assessed a fee to have your Installment Agreement reinstated.
The bottom line
Having an unpaid tax debt hanging over your head can be very unpleasant and it’s also extremely burdensome for individuals who are attempting to operate a small business. If you’ve attempted to negotiate an Offer in Compromise but the IRS is unwilling to play ball, consulting a knowledgeable tax expert is a must. If your offer was rejected and you’re not sure how to proceed, contact experienced tax attorney Jessica Grace at (612) 326-5291 to discuss your options.