Offer in Compromise Law

When you owe the IRS money and have tried everything to pay it off with no luck, consider making the IRS an “offer in compromise” or “OIC” for short – to settle your tax bill. An offer in compromise allows taxpayers to wipe out their tax debt by paying the IRS less than what they owe in back taxes. The IRS is generally reluctant to agree to offers in compromise, but will do so when the OIC represents the agency’s best shot at getting the largest amount of debt possible from the taxpayer within a reasonable amount of time. You may need a tax lawyer to help you if you find yourself here.

When considering a taxpayer’s OIC, the IRS will look at these factors (a) your ability to pay; (b) your income; (c) your expenses and debts; and (d) the value of your assets. You must also be current with their filing and payment requirements, and cannot be in an open bankruptcy proceeding.

When you submit your application for an OIC, you will also have to include a $150 filing fee and an initial payment on the settlement amount (unless you meet the Low Income Certification guidelines.) This payment is non-refundable, but the amount will vary based on the payment option that you select. There are two payment options to choose from: (1) a Lump Sum: in this option, you pay your settlement amount very quickly. If you select this option, you must submit 20% of the settlement amount as an initial payment, then pay the remaining balance in five payments or less.; and (2) some periodic payments – with this option, you will submit an initial payment of your choosing, then continue to pay off the balance of the debt in monthly installments.

If you comply with all the filing requirements and the IRS still rejects your offer, you can file an appeal of the decision within 30 days using Form 13711, Request for Appeal of Offer in Compromise.

What Is a Tax Lien?

You may have heard of the contractor’s (or mechanic’s) lien, but what is a tax lien? Generally, it is a legal claim against an asset or assets in order to guarantee the payment of a debt or the performance of some obligation. Liens make it difficult to sell the assets or secure lines of credit, so they offer a powerful incentive for the property owner to pay the bill or perform the action necessary to remove the lien. For example, if you hire a contractor to remodel your kitchen but refuse to pay the bill, the contractor can take out a workman’s lien on your property to force you to pay the bill. Until you do, you won’t be able to sell your property or take out a second mortgage on it.

A tax lien is exactly what it sounds like: a lien placed on an asset based on a taxpayer’s refusal or inability to pay their tax bill. And since this is the IRS we’re talking about, the tax lien will take priority over almost any other debt or obligation that is secured with that asset. Also, an IRS tax lien isn’t tied to any particular asset. Instead, it attaches to all of the taxpayer’s assets, which can shut down an individual’s financial life until they settle up with the IRS.

There are three steps the IRS goes through before it imposes a tax lien: first, the IRS will asses a taxpayer’s debt. Next, the IRS sends a “Notice and Demand for Payment” that explains the tax debt and informs the taxpayer that they must pay it. Finally, the IRS files a “Notice of Federal Tax Lien” that alerts the taxpayer and their creditors that the government has a legal interest in the taxpayer’s assets.

How to Avoid a Tax Lien

The easiest way to avoid a lien is to pay your tax bill on time. If that isn’t possible, however, there are still a few options available that could lessen the impact of a tax lien. The IRS will allow taxpayers to utilize these options if it fits with the agency’s interest in getting the most money possible from the taxpayer. Taxpayers can (a) File for a discharge of property. This allows a taxpayer to sell property free of the lien (most likely to pay off their tax bill). (b) apply for a Certificate of Subordination. The lien stays in place, but the IRS takes a backseat to other creditors. This can make it easier for the taxpayer to secure lines of credit; or (c) apply to have the lien notice withdrawn. This erases the lien and makes it as if the lien had never been there in the first place.

Lien Withdrawal vs. Lien Release

A lien withdrawal differs from a lien release in two important ways: first, a lien release occurs automatically when a taxpayer pays off their debt to the IRS, while a taxpayer must apply for a lien withdrawal. Second, a taxpayer doesn’t necessarily have to pay off their debt to obtain a lien withdrawal. A tax adviser may be able to secure a withdrawal if the lien was filed incorrectly or if the taxpayer’s situation warrants it.