The fourth IRS Publication 4681 is a notice of audit sent by the Internal Revenue Service to taxpayers who have not received an Offer in Compromise from the agency. If taxpayers have not received an Offer in Compromise, they are required by law to respond to the notice with what is called a “Declaration of Default”. With a declaration of default, taxpayers formally agree to repay all federal taxes, including the IRS. An Offer In Compromise is what is needed if a taxpayer wants to receive an Offer in Compromise.
The IRS publication 4681 is meant to help taxpayers understand how their debts will be reduced. This document is often called the “Compromise Agreement”. The terms of this agreement between the IRS and a taxpayer are commonly known as an “Opinion” or “resolution”. A taxpayer may not receive an Offer in Compromise from the Internal Revenue Service until he or she receives an opinion declaring that the debt cannot be collected.
There are two requirements for receiving an Offer in Compromise: you must reside in the United States, and you must not owe more than the adjusted gross income of taxable income. To determine if you meet these qualifications, check the applicable sections on the IRS website. A taxpayer may also qualify for an OIC at the same time he or she sends in their tax returns. The only way a taxpayer ever loses their OIC status is if they owe more than the qualifying amount to the IRS, file bankruptcy, or become mentally incapacitated. The IRS will then not send an Offer in Compromise to a taxpayer who meets one or more of those conditions.
An OIC cannot be canceled, however, until the debt that it represents has been fully paid off. The IRS issues a notice of intent to cancel an OIC when a taxpayer, through any method, “cancels” his or her tax return. OIC is not “canceled” when a person ceases to be a liable entity (i.e., when they go bankrupt). OIC is canceled when a person becomes permanently disabled (e.g., if they die), is homeless, starts receiving income support, or begins receiving Social Security retirement benefits. If an OIC is listed on someone else’s tax return, the refund cannot be considered as an installment payment because it was due for tax filing purposes.
An OIC can be canceled if a debtor does not settle his/her taxes for at least two years. The IRS calls this “voluntary resolution”. The IRS publishes a list of examples of other situations that might result in a borrower becoming “involuntarily discharged”. Examples include a divorce or settlement of debt, filing for bankruptcy, or ending up totally unable to pay the debt. In each of these situations, the borrower would have been required to settle the debt before becoming declared insolvent, but since the debt was not resolved, the OIC must be cancelled.
If you are in a situation where you are thinking about filing bankruptcy, the IRS publication points out that you must cancel your OIC before you file. If you do not cancel your OIC, the government will take over your bankruptcy case. If you are no longer able to pay the debt, the bankruptcy judge will order you to repay the balance due on your credit card debt. The bankruptcy judge may also issue an order for you to repay an amount equal to all back taxes owed plus interest and fees, plus any other costs he or she deems appropriate. Since bankruptcy is a court proceeding, you are not automatically discharged from OIC status, but you should definitely call the IRS before you file.
It is important to note that “involuntary” discharges do not happen very often. In some cases, the taxpayers filing bankruptcy do not receive one hundred percent of their debts forgiven. However, in other cases, the IRS will forgive the majority of the debts owed to the Internal Revenue Service. In most cases, this percentage is larger than one hundred percent because the forgiven debts are usually not actually fully taxable income. In general, if your debts are forgiven, your taxable income is reduced by about ten percent.
Because many taxpayers have problems paying their debts after a bankruptcy, the IRS publishes a helpful informational booklet to help taxpayers with their tax problems. These booklets can be found in the IRS website or at the local library. The IRS publication 4681 tells taxpayers how to reduce their tax liabilities and provides information on the new bankruptcy laws.