Paying for Your Offer In Compromise – Which is the Best Way?
We have talked a lot about offers-in-compromise but a question not often asked is: which way is best to pay for the offer? The answer may surprise you.
Before addressing how the offer is paid for, let’s briefly touch on fees. Unless you qualify for a low-income certification, you will need to pay a $205 application fee. Your offer can be rejected and you will lose any payments you make with the offer if you fail to pay the fee. So make sure that no matter what payment method chosen that you ensure a separate check for the application fee is enclosed with the offer.
If you want to know more about the low-income certification, you can follow this link to a pdf copy of the instructions for Form 656 and read more there.
Paying for the Offer
There are two methods of payment for an offer-in-compromise: lump sum or periodic payment. It can make a big difference depending on which method you choose.
Before going into the payment methods, let me remind you that your offer amount is a combination of two things – your equity in assets and your net monthly household income times either 12 months or 24 months. If you are not clear on what net monthly household income is, you can read more here. You use the factor of 12 months if you are paying the offer in a lump sum offer and 24 months for a periodic payment plan.
To help explain the payment methods, let me give you some sample numbers. Let’s assume that John is making an offer and his equity in assets are $1,000 and his net monthly household income is $200.
Lump Sum Payment Plan
Under the lump sum payment plan, you will pay 20% of the offer amount down and then, once the offer is approved, the remaining balance to be paid in 5 or fewer payments within 5 months of the offer being accepted. You don’t need to put the 20% down if you qualify for the low-income certification, instead you will pay the full balance within 5 months of the offers acceptance, in 5 or fewer payments.
So how would a lump sum offer look for John? His offer amount would be $3,400 or $1,000 equity in assets plus $200 net monthly household income times 12 months or $2,400. John would need to make a payment of $680 or 20% down (unless he meets the low-income certification). Once approved, the remaining $2,720 will be due in 5 or less payments within 5 months of the offer’s acceptance.
Under the periodic payment plan, you will pay the offer amount in monthly payments within 6 to 24 months of submitting your offer (unless the offer is rejected then your obligation to pay will end). Failure to make those payments as required will cause your offer to be returned (which is not a rejection and there is no way to challenge that). The amount of payments do not have to be equal and so you can have a balloon payment for the last payment. The only requirement is that the payments made equal the total amount of the offer.
Turning again to John, John’s offer amount would be $5,800 or $1,000 in equity in assets plus $200 net monthly household income times 24 months or $4,800. That $5,800 can be paid in 6 to 24 months, in even payments or in varying amounts. So John could pay $242 (rounding up) each month for 24 months to pay his offer in full.
As you can see, the method of payment can have a big difference in how much the offer is. John pays $2,400 less if he pays lump sum. The big downside to the lump sum offer though is that he has to put 20% down immediately rather than stretch it out. The reason this is important is that if the offer is rejected then generally all payments made are not refundable (there is an exception but it is not applicable to most cases so I will omit discussion of it).
Can I change my mind about method of payment?
Not often advertised by the IRS, you can change your mind. If you need to switch between doing the offer as a lump sum payment plan or periodic payment plan, you can. There are some good reasons to do this, such as you need more time to pay the offer in full. You just need to ask. I don’t use this in many cases but it is there as an option and can be a big help to the right person.
Are there any restrictions on how I pay the offer?
Some. Generally, you can use your own money and assets to pay the offer. You can also borrow the money or get the money from friends and family. You can’t use an expected or current tax refund or money already paid to the IRS. Money seized through an IRS levy do not count either. You also can’t use an anticipated tax benefit from a capital or net operating loss (which can be used to generate a future tax benefit).
A caveat, if you use funds from an IRA or 401k plan then you will need to consider the taxes due on any distribution.
I am Maine’s IRS Problem Solver. My firm helps Maine taxpayers in trouble. If you or someone you know in Southern Maine wants more information on how to resolve your IRS tax problems, please feel free to contact me directly at 207-502-7181 or by filing out my contact form. A Maine tax attorney can help you consider your options.
James D. Wade, Esq.
Law Office of James D. Wade
57 Portland Road, Unit 3
Kennebunk, ME 04043