When it comes time to settle your tax debt, you need a place to start. Some agencies will tell you it’s a complicated process that you should never go through without help from a professional. Making the decision to file an Offer In Compromise or for an Installment Agreement isn’t as hard as it sounds. Most taxpayers are able to see which path is right for them after a simple explanation of each process. There are disadvantages to an Offer In Compromise vs Installment Agreement, but there are advantages as well. This guide will help clear things up. If you prefer to watch a video on this subject, scroll to the bottom.
Benefits Of An Offer In Compromise vs Installment Agreement
The largest benefit to an Offer In Compromise being accepted is the completion of your tax debt. Once the IRS accepts an offer and you pay it in full, your responsibility for the tax liability is over. You won’t have to worry about keeping up with payments on a monthly basis, or a two-year review of your financial standing. Both elements are necessary to remain in good standing with the IRS when you make an Installment Agreement.
Another financial consideration is the status of any tax liens. If the IRS has a lien on property you own, an Offer In Compromise will clear that up in most situations by filing a lien withdrawal. If you had prior debts that expired, a lien withdrawal is usually not approved, but the liens will be released. Depending on your financial situation, tax liens may place a strong incentive to pursue an Offer In Compromise vs Installment Agreement. You might also consider that if the IRS rejects your offer, you can still request an Installment Agreement. Finally, it is to your benefit if the IRS accepts your OIC because it means you pay less than you owe.
What Are The Drawbacks Of An OIC?
The biggest obstacle to an OIC, or Offer In Compromise, is that the IRS will not accept them if your financials and/or situation do not qualify. Why does the IRS turn down so many OIC’s? Because many tax relief companies and individuals send them out when they have no shot at acceptance. Our tax attorneys go through an extensive review process before sending one out so our acceptance rate is much higher than that of other firms or the general public.
Here’s another question that might be a drawback if you’re considering an Offer In Compromise. Are you prepared to fork out a large sum of money and assets to complete your debt? The IRS will often expect you to liquidate any assets you have to come close to the amount you owe or come up with the same amount of money the items were worth at their “quick sale” value. For some, they may not want to part with their items or property. However, sometimes an OIC is accepted when there is property equity depending on the situation.
The IRS reserves the right to file a federal tax lien against you and your property while the OIC is pending. If you already have liens this is not an issue. In the majority of cases liens are not actually filed while the OIC is pending, but it does happen and we let our clients know it is a possibility. For most people, the cost savings vs. the small chance of lien is worthwhile. If you must absolutely avoid a lien and none have been filed yet, typically the only option is to pay the balance down below $50,000 and request a direct debit payment plan over 72 months.
Benefits Of A Partial Pay Installment Agreement Over An OIC
Start where the drawbacks of an Offer In Compromise leave off. Perhaps the most attractive aspect of an Installment Agreement is not having to liquidate assets most of the time. In fact, you may be eligible for extremely low monthly payments under a Partial Pay Installment Agreement. In some cases, this ends up being a much lesser amount, as each year’s debt that passes the ten-year mark becomes uncollectible. See our guide on Collection Statute Expiration Dates for more information on that.
A Partial Pay Installment Agreement works favorably for taxpayers that can’t make a reasonable Offer In Compromise, or whose offer has been rejected. Also in complex financial situations, it is easier to get a PPIA approved than an OIC. This gives you a better chance of acceptance and often a much faster decision. With a Partial Pay Installment Agreement, it’s very important to stay on top of each new tax year and make your monthly payments. Any discrepancies in these regards may result in the revocation of your agreement. The IRS may also review your agreement in the future and try to make you pay more if you are making more.
What Are The Disadvantages Of A PPIA?
One reason the IRS prefers the PPIA, or Partial Pay Installment Agreement, is it gives them the opportunity to review your financial standing every two years. If you have a boost in income or acquire any new assets, the IRS can increase your monthly payments. While it’s not a disadvantage to keep up with your taxes, it is a headache to have to worry about making payments over a long period of time.
The IRS is also more likely to accept a Partial Pay Installment Agreement vs Offer In Compromise in many situations. New tax debt is nowhere near the Collection Statute Expiration Date. This appears to be a benefit in your favor, but it gives the IRS more time to collect. Their hope is that your financial situation will improve, allowing them to collect more over time.
Another disadvantage that comes along with a PPIA is the existence of tax liens. You won’t have the benefit of the IRS lifting those liens as you do with an Offer In Compromise. Liens can hurt your financial ability to secure loans on good credit, and you may have to deal with them during the terms of your Installment Agreement. The IRS will release the liens. They will not withdraw them in most cases.
Similarities In Filing Processes
We use different forms for filing an Offer In Compromise vs Installment Agreement. However, much of the information is the same. It’s a common misperception that an Offer In Compromise is the only way to settle with the IRS for a lesser amount. Although the IRS hopes to collect later on a PPIA, this requires a positive change in your financial future. That’s not a bad thing in itself. A PPIA means the IRS wants to look over your finances every two years versus one time with an Offer In Compromise. The IRS asks for full financial disclosure of assets, income, and expenses whichever path you choose.
Final Thoughts On Choosing An Offer In Compromise vs Installment Agreement
It’s clear that the IRS prefers a Partial Pay Installment Agreement over an Offer In Compromise. They see it as a chance to collect in the future on past taxes that you have an inability to pay now. To the IRS that’s better than an Offer In Compromise, but there are exceptions to that rule. You can always attempt to file an Offer In Compromise vs Installment Agreement first. File for the Partial Pay Installment Agreement if the IRS doesn’t accept your OIC. Just keep in mind that you have to stay current on taxes and filing during the OIC. Filing the OIC also extends the Collection Statute Expiration Date while it is pending.
If you owe more than $20,000 and need help deciding the best route for you, we can help. Fill out a contact form on our Contact Page. In-person consultations are also available in Las Vegas, Nevada. If you owe less than that, see our tax help guide for information on resolving your tax debt.