Hi, I may be in situation where I need to submit an offer in compromise.
I am overseas, and I understand I might have til mid December to file:
My goal right now is to have as much time as possible to raise money to pay taxes, and limit penalties.
Say I made an offer to pay $15,000. Upon the date of submitting my return, should I send the $15,000 as my full OIC offer? Or, since processing an OIC takes a while, would I need to send some amount with the return designated as to pay down my tax bill? That is, if I sent $15,000 as an OIC on filing due date, and made it known that was my OIC amount, would the IRS consider me as having paid zero upon filing date, since the $15,000 might be tied up in the OIC processing timeline?
Does this make sense as I have described? Really, I am trying to figure out
1) What amount to send IRS by filing deadline, if I am prepared to make $15,000 OIC
thanks!
realize the IRS does not have to accept a OIC
see this link for more info
https://www.irs.gov/payments/offer-in-compromise
That's exactly the thing - if I submit $15,000 and OIC is denied, do I still get credit as having submitted the payment on the date of the filing of the return?
If your intention was to avoid Interest and Penalties, it's too late. They've already begun. You will be charged interest and late payment penalties until the taxes you owe are paid in full, the failure to pay rate is decreased from .5% to .25% per month while your installment agreement is in effect, but interest continues.
The amount you put down as the "down payment" reduces the total tax owed. You will then offer a payment plan that can span up to six years.
Please note that if you are delinquent in your taxes in any of those six years the Offer can be terminated, and full restoration can come into play.
Hi, why is it too late to avoid penalties, if my filing due date (living overseas) is 15 October (with extension)?
I suppose in this case, if I have cash that I am prepared to give as an OIC offer then makes sense to just send the money to the IRS now.
Would the Offer in compromise only cover 2021 income or are you trying to address multiple tax returns?
Not knowing your situation, are you aware of 'currently uncollectible' status which may be an easier strategy to implement?
Offer in compromise is a complicated process, especially for multiple tax years. It likely should not be addressed in a blog format and may require professional guidance.
Just trying to deal with 2021. I don't expect this situation in any other years. I am squared away with IRS in all previous years. Just computed that I have $44K tax bill for 2021. Otherwise I live off military retirement, which covers living expenses. 2021 was exceptional.
From what I understand about OIC, I provide data on my situation (assets, circumstances), IRS uses that to compute what they could expect from me over 10 years. They would accept an OIC if it is around that computed amount, and then I think you have 2 years to pay the proposed amount (and pay 20% up front of the proposed amount) .
I don't have home equity, and my only other assets are what remains in my Roth IRA. I have $44K in that IRA, but I think that would result in unreasonable financial burden (per IRS docs, they consider that) and they perhaps would likely understand that wiping out an IRA to pay a tax bill is a bit extreme, especially since I have VA disability status, and leaves one at high risk of not being able to cope with future emergencies).
Thing is I never made estimated tax payment after I made the Roth IRA distribution. So I am trying to get to the IRS whatever I can send now. But hence a dilemma - if I send $5K now (not as part of OIC paperwork), and offer to pay $20K, then by the time I submit the OIC I won't have money left to send as the initial OIC payment, unless the IRS would consider the $5K I send now. Yeah, gets complicated, and IRS not answering the phones makes things all the worse...
Sure would be nice if US Govt extended CARES Act til Dec 2021...
What is really crazy, is that in looking at the OIC pre-qualifying tool at https://irs.treasury.gov/oic_pre_qualifier/, it says you have to have made all estimated tax payments prior to applying for OIC. But that is a paradoxical situation - my estimated tax on the quarter I made the IRA withdrawal was about $10K. But I don't have $10K on hand at moment. So seems I would have to pay about 25% of total taxes for 2021, before I could submit an OIC for 2021!
Here is what it says on the OIC booklet:
Before your offer can be considered, you must (1) file all tax returns you are legally required to file, (2) have received a bill for at least one tax debt included on your offer, (3) make all required estimated tax payments for the current year, and (4) make all required federal tax deposits for the current quarter if you are a business owner with employees. The IRS will immediately return your offer without further consideration if you have not filed all legally required tax returns.
Or maybe I am interpreting "current year" wrong. I thought it meant to have submitted estimated payments for the current tax return you are working on. I am working on 2021 return, don't expect any estimated payments in 2022 (unless I have to withdraw from IRA again to pay down this balance!). Or they mean 2022 as the "current year".
@bhuether wrote:
Hi, why is it too late to avoid penalties, if my filing due date (living overseas) is 15 October (with extension)?
I suppose in this case, if I have cash that I am prepared to give as an OIC offer then makes sense to just send the money to the IRS now.
There is a failure to file penalty and a failure to pay or underpayment penalty. You don't get the failure to file penalty as long as you file "on time", whatever you can extend that to. But the failure to pay/underpayment penalty is applied whenever you owe a tax debt that is more than a certain dollar amount.
https://www.irs.gov/taxtopics/tc306
"The United States income tax system is a pay-as-you-go tax system, which means that you must pay income tax as you earn or receive your income during the year. You can do this either through withholding or by making estimated tax payments. If you didn't pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax."
You can avoid the underpayment penalty if
1. the tax you owe is less than $1000
2. the tax you paid into the system is at least 90% of your tax liability this year
3. the tax you paid into the system is at least 100% of your liability last year (or 110% of your liability last year if your income is more than $150,000).
Your final estimated payment was due January 15, so you are one month late. If you pay by February 15, you would still be considered 1 month late. You are also considered to be 9 months late on the payment that was due April 15, 7 months late on the payment that was due June 15, and 4 months late on the payment that was due September 15. The IRS can take what you owe, break it up into 4 payments that should have been made on those dates, and assess penalties and interest back to those due dates.
My suggestion is to pay as much as you can now and try and get to that 90% figure or the 110% figure from last year. Then you would only have 1 month of penalties (if the payment is made by February 15).
The real question is, are you willing to pay the tax you owe, or do you want to reduce your tax bill.
Two final notes:
1. the underpayment/failure to pay penalty is just 0.5% per month. Yes, it adds up, but it's not as scary as it might seem. You will also owe interest on any taxes that are paid late, even if you have extensions to file late. Interest is about 4% APR, and will go back to the due dates for the estimated payments. Because the interest accrues no matter what, you don't gain the advantage from delaying your actual filing that you think you are gaining.
2. If you don't include the penalty on your tax return, the IRS will bill you. At that point you can request an abatement. There is an abatement for people who have never owed a penalty before, and an abatement if you can show reasonable cause why you didn't pay. Even if the abatement is granted, the interest can't be waived under law. So you still want to pay what you can when you can to keep the interest down.
"Thing is I never made estimated tax payment after I made the Roth IRA distribution. "
How do you owe $44,000 from a Roth IRA distribution? Withdrawals of contributions are never taxed. Withdrawal of conversions are subject to a 10% penalty if you are under age 59-1/2 and the conversion was less than 5 years previous. Withdrawal of earnings is subject to regular income tax and a 10% penalty if you are under age 59-1/2. Even if you are under age 59-1/2, how could you withdraw so much from your Roth that you owe $44,000 but saved nothing for the taxes? You would have to have withdrawn more than $200,000, probably.
Are you sure your taxes are computed correctly?
As you have indicated the details are complicated. I'm sure you realize the OICs require a $205 application fee which is nonrefundable.
In the end, based on your situation, you must determine your eligibility or seek legal assistance.
It may be best to file the return and then the OIC since it is a current tax return. You may want to reach out to the Taxpayer Advocate Service (TAS).
They are in place to assist in situations where you are unable to obtain resolution on your own.
This will get the process started for you. It's not going to be a fast process because they are handling a large volume at this time.
If you do not hear from TAS within one week of submitting Form 911, contact the Taxpayer Advocate office where you originally submitted your request. Incomplete information or requests submitted to a Taxpayer Advocate office outside of your geographical location may result in delays.
I withdrew about $240,000. Contributions over the years were about $70K. I had included in the withdrawal what I thought was enough to pay the taxes, but incurred all sorts of additional costs moving, paying larger down payment than planned to keep mortgage affordable, loss on currency conversion, customs clearance, etc, and then had only about $5K left.
Hi, thanks for the tips. Hopefully the TAS can deal with email communications, since overseas mail delivery is not quick...
On the OIC booklet, I see
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PAYING FOR YOUR OFFER Application Fee Offers require a $205 application fee. Exception: If you are an individual and meet the Low-Income Certification guidelines, there is no requirement to send any money with your offer.
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Not sure if they really mean that the exception is for offer money (versus application fee)
@bhuether wrote:
I withdrew about $240,000. Contributions over the years were about $70K. I had included in the withdrawal what I thought was enough to pay the taxes, but incurred all sorts of additional costs moving, paying larger down payment than planned to keep mortgage affordable, loss on currency conversion, customs clearance, etc, and then had only about $5K left.
It's still not clear if you want to reduce your tax liability or pay the entire amount over time. You would only use the OIC if you want to reduce the amount. If you want to pay the full amount over time, I would pay as much as you can now (before February 15) and then file on time (April 18, if you have all your documents). If a payment plan is approved, the late payment penalty is reduced from 0.5% to 0.25% per month. You still pay statutory interest. So the overall APR equivalent (interest plus penalty) would be 6-7% per year.
The OIC application fee may be waived if you meet the low income criteria.
Wow - thanks for all this depth! Just some follow on questions:
1. How can I be 9 months late on the 15 April 2021 payment, if I made my IRA withdrawal in May 2021?
2. Regarding "My suggestion is to pay as much as you can now and try and get to that 90% figure or the 110% figure from last year". I am not entirely certain which years and which amounts are being referenced here. One estimated quarterly tax payment on the taxes resulting from my May 2021 withdrawal is about $10K = (.90*44K)/4. Only by around October 2022 will I have around $10K in cash.
3. Regarding this "My suggestion is to pay as much as you can now and try and get to that 90% figure or the 110% figure from last year. Then you would only have 1 month of penalties (if the payment is made by February 15)." would you recommend that I withdraw again from my IRA and/or brokerage account to achieve this? Doing so will almost wipe out my assets, and will also have tax implications for 2022 tax year...
4. Regarding "The real question is, are you willing to pay the tax you owe, or do you want to reduce your tax bill.". I want to get out of this debt as soon as possible, but also have to balance realities such as fact that whole reason I moved to Moscow was to try and gain partial custody of biological son, which is legally expensive in unforeseen ways. Also I spent week in COVID treatment center in Moscow and now blood tests are indicating various issues perhaps COVID induced, and so I may have health costs to consider. Plus in general, just seems daunting to nearly wipe out my remaining assets to pay this bill on time. So I am trying to find some compromise, and maybe OIC really makes sense.
Curious: Does the IRS have an online tool that lets you see in real time your debt status (penalties, interest, etc)?
Thanks again - this is really helping me deliberate over options. Lots of nuances.
1. The IRS annualizes your income, although if you file form 2210 properly, you can reduce the effect. However, if you don't annualize your income, the entire payment was due June 15, and the entire amount is past due on Sept 15 and January 15. Annualization may be in your favor in this case. I can't tell for sure without doing a lot of calculations.
2. Your tax liability for 2020 is line 24 of form 1040. Your tax liability for 2021 would also be line 24 of your 2021 return. (Your tax liability is what you actually pay to the government regardless of when you pay it. If you had $5000 of payments and got a $1000 refund, your liability was $4000. If you had $5000 of withholding and payments and owed a further $1000, your tax liability was $6000.)
For 2021, you need to pay up to 90% of your 2021 liability, or 110% of your 2020 liability, to avoid an underpayment penalty. It sounds like your 2020 income was probably much lower than 2021, so I wonder if you can make an estimated payment now that will bring your total of 2021 withholding and payments up to 110% of your 2020 amount. That will block the underpayment penalty, and probably interest, from accruing before April 18, 2022.
After April 18, 2022, you will be liable for a failure to pay on time penalty, which is the same terms as the underpayment penalty (0.5% per month plus interest). The failure to pay penalty is assessed even if you have an extension to file, because April 18 is also the payment deadline and a filing extension is not a payment extension (there are no payments extensions, in fact). But, if you can afford to make a payment now based on your 2020 information, that will make sure that the penalty and interest clock starts on April 18, 2022 and not June 15, 2021.
3. That depends on how much you really owe. Taking account of all your withholding and payments so far, how much more would you have to pay by February 15 to get the total to equal 110% of your 2020 line 24?
4. Only you can make that decision given your total facts and circumstances (as well as the ability to work other jobs, etc.)
5. "Curious: Does the IRS have an online tool that lets you see in real time your debt status (penalties, interest, etc)?" Yes, you can review your account online, although I don't know how often it's updated. And for now, it won't show a balance because you haven't filed.
https://www.irs.gov/payments/your-online-account
Two other points to be aware of:
6. If you are "permanently and totally disabled" under IRS regulations, you are exempt from the additional 10% penalty on early IRA withdrawals. For the IRS, permanently and totally disabled means unable to perform substantial gainful employment. This is not necessarily the same thing as a VA disability, because some forms of medical disability will still allow you to work. Only you or your doctor can determine if you qualify for being disabled for income tax purposes.
7. If you make an IRA withdrawal directly to the IRS to pay a tax debt, that is also exempt from the 10% penalty for early withdrawals. So I would probably not make any IRA withdrawals to pay income taxes, until you have your OIC or payment plan, and you can arrange a direct transfer to the IRS. Your money would go a little farther that way.
@bhuether wrote:
Or maybe I am interpreting "current year" wrong. I thought it meant to have submitted estimated payments for the current tax return you are working on. I am working on 2021 return, don't expect any estimated payments in 2022 (unless I have to withdraw from IRA again to pay down this balance!). Or they mean 2022 as the "current year".
This is where you need to consult with an experienced tax accountant, or since you are overseas, maybe the taxpayer advocate. The requirement to receive a bill suggests that you can't apply for the OIC until you file your 2021 tax, pay whatever you can afford (if anything) and then get a bill because you didn't pay it all. Maybe in that case, "current year" means you must be current on 2022 before you can apply for an OIC for 2021. But I am not an expert here and maybe the TAS can help you.
Hi, about this: "For 2021, you need to pay up to 90% of your 2021 liability, or 110% of your 2020 liability, to avoid an underpayment penalty." For what it is worth, in 2020 I had a tax refund, no liability.
And this: "how much more would you have to pay by February 15 to get the total to equal 110% of your 2020 line 24?" In 2020 I owed nothing. My tax bill situation is only for 2021 following my May 2021 Roth IRA redemption.
About 7 below: To make a reasonable offer for an OIC, I would have to tap into some portion of my IRA again either way.
Here is an interesting question: If I paid $20K by April 18, and then sometime much later IRS approved an OIC for the amount $20K, would I already be in the clear, with no penalties?
In your statement you said you had no tax liability. 'For what it is worth, in 2020 I had a tax refund, no liability.'
However, a refund does not indicate zero tax liability. Please check line 24 , Form 1040 for 2020. This is your tax liability for 2020 and if that line is zero, then any dollar amount paid in advance would be more than required.
Penalties begin upon the date of late payment, which for 2021, will begin on April 18, 2022. The IRS will again use their discretion when determining the OIC. Once the OIC is accepted you will be considered as paid in full for only the period requested.
As indicated by @opus_17 you might want to consult with an experienced tax accountant, or since you are overseas, maybe the taxpayer advocate service (TAS). Information is added here for your convenience.
This will get the process started for you. It's not going to be a fast process because they are handling a large volume at this time.
If you do not hear from TAS within one week of submitting Form 911, contact the Taxpayer Advocate office where you originally submitted your request. Incomplete information or requests submitted to a Taxpayer Advocate office outside of your geographical location may result in delays.
Hi Diane,
In reading this,
"Please check line 24 , Form 1040 for 2020. This is your tax liability for 2020 and if that line is zero, then any dollar amount paid in advance would be more than required."
I am trying to reconcile with what IRS writes about estimated taxes. They say
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Individuals, including sole proprietors, partners and S corporation shareholders, may need to make estimated tax payments if:
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And here is where I am just not sure. The language "they expect" is not really clear. In April 2021 I didn't "expect". Only in late May 2021 did I "expect".
In any case I am making some payment immediately, just to hedge my bets...
Hi,
I noticed this when reading about using IRA to pay tax debt:
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You’re somewhat misreading the quote; you can withdraw the money to pay the tax debt, but you won’t be eligible for the 10% tax exception.
See Exceptions to the 10% Additional Tax in Topic No. 558 Additional Tax on Early Distributions From Retirement Plans Other Than IRAs | Internal Revenue Service for more information.
That said, as to whether you can request that the IRS issue a levy, so you can avoid the penalty: You can probably request it, but generally nobody wants an IRS levy. According to the IRS’ Levy page,
An IRS levy permits the legal seizure of your property to satisfy a tax debt. It can garnish wages, take money in your bank or other financial account, seize and sell your vehicle(s), real estate and other personal property.
It’s not like a cafeteria plan where you can pick and choose what actions you want to be taken.
Is the IRS so difficult to work with, such that one can't have a down to earth discussion, where I would tell them, "Look, I don't have home equity, I already sold my foreign plated car - and only car - to raise funds to pay my debt to you, my current income is pretty much right around what you compute as part of your OIC calculator in terms of allowable expenses, so really nothing to seize there, which leaves me with mutual fund assets, which your OIC calculator indeed shows as the assets that would be used in the offer estimation. So since we already know me paying the debt in the OIC payment timeframe amounts to me tapping into Roth IRA assets, just let me take the money from there now penalty free, as opposed to me purposely waiting for balance due notices, ignoring them to trigger your levy machinery. And thanks for allowing such a rare miracle of a penalty free action."
How odd that achieving the penalty waiver amounts to this oddly probabilistic approach of levying the very asset that my OIC would be contingent on. So if IRS approves my OIC, they would force me to take a 10% penalty?
If the IRS levies your retirement account to pay the back taxes, then there won't be the 10% early withdrawal penalty. You cannot just take it out early yourself to pay them. If you approach them and ask them to take it out, then they might do so and only then, you won't be additionally penalized.
However, if the OIC has not been accepted yet, it may open the door for them to take the entire tax liability.
Look at 5.11.63 in the following link for further guidance from the IRS regarding the matter. Levying from Retirement