Washington D.C. Offer in Compromise

OTR Tax Settlements for Businesses and Individuals

If you're behind on OTR taxes, you may want to look into an offer in compromise to settle your taxes for less than owed. The OTR offers settlements to qualifying taxpayers for income tax, sales tax, franchise tax, and all other taxes administered by the OTR – but you must meet strict criteria to qualify. Read on for details, or use TaxCure to find a tax professional to help you today.

Key takeaways

• Offer in compromise – settle OTR taxes for less than owed. 
• How to apply – prove you can't afford to pay, you don't really owe the tax, or it would be inequitable to force you to pay. 
• Pre-qualification requirements – up to date on tax filing and payment requirements.
• Payment options – pay a lump sum or spread out the settlement over up to 12 months.
• Alternatives – set up monthly payments, apply for a hardship, or talk with a tax pro for more options. 

What is an OTR offer in compromise?

An offer in compromise is when the OTR lets you settle taxes for less than owed. The OTR may approve settlements for any individual or business taxes administered by the agency. You must submit an application and meet other criteria.

The Washington Office of Tax and Revenue may be willing to settle taxes through an offer in compromise in the following situations:

• Insufficient resources – the taxpayer cannot afford to pay the full liability.
• Doubt as to liability – there's a legitimate doubt that the taxpayer owes the liability.
• Economic hardship – the taxpayer is able to pay, but forcing them to do so would create undue economic hardship.

When you submit your application, you'll note which of these conditions applies to your situation, and then, you'll explain why you should be eligible. 

There can be a lot of subjectivity in each of these categories, and doubt as to liability requires a lot of knowledge about taxes and D.C.'s tax code in particular. That's why it's important to work with a tax professional who has experience with both the OTR and offers in compromise. 

Who's eligible?

To be eligible, you must owe an assessed balance to the OTR, and you must have exhausted all of your relevant appeal options. All outstanding tax returns must be filed, and you or your business must not be in an open bankruptcy proceeding. 

For example, say that you've incurred a tax debt due to failing an audit. You will get a chance to appeal the results of the audit. If you disagree with the initial appeal results, you may have further appeal rights. You cannot apply for an OIC until all of these appeal rights have been exhausted. 

Here's another example: say you're getting ready to file an OTR individual income tax return and have an unexpected balance due that you can't afford to pay. Unfortunately, you'll have to wait until the return is processed and the tax has been formally assessed before you can apply for an offer. 

Which taxes may qualify for an offer in compromise?

You can apply for an offer on individual income tax, withholding tax, sales tax, and any other OTR taxes. Not sure if your tax liability qualifies? Then, contact the OTR directly or reach out to a tax professional for help. 

What if I also owe IRS taxes?

The IRS also offers an offer in compromise program. You can apply using Form 656-B, which is a booklet that contains the application as well as the collection information statement and application instructions. 

In most cases, if you're applying for an OIC on both the federal and state-level (or in this case, district-level), it's advantageous to apply for one before the other, but the most effective order depends on the rules in your state (or in this case, district). A tax pro can be instrumental in helping you navigate this process. 

How to apply 

To apply, you must submit the following:

• OTR-10 – This is the District's offer in compromise application form, where you detail your offer, the reason you should qualify for the settlement, and other details.
• PA-1 – Individuals should submit this financial statement to the OTR. Alternatively, you can use IRS Form 433-A (OIC). 
• PA-2 – Businesses can use this form to submit financial details to the OTR, or they can file IRS FORM 433-B (OIC). 
• Financial statements for businesses – Business applicants should also include a profit & loss report and a balance sheet.

You can download the OTR forms from their website. On your application, you must explain why you deserve an offer based on the reason you're applying. For instance, if you're applying for doubt as to liability, you must explain why you don't really owe the tax. If you're applying based on hardship, you must outline why it would be inequitable to make you pay the tax in full. 

Send your application to:

1101 4th Street, SW
Suite 270W
Washington, DC 20024

If a Collection and Enforcement Administration (CEA) employee has been assigned to your account, you may be able to apply directly through them. Ask them if that's an option in your situation. 

Making payments on an offer in compromise

There are two payment options -- lump sum or periodic -- and the option you choose determines how much you need to send in when you submit your offer. 

• Lump sum – send in the full offer with your application. If the OTR says that they'll only accept the offer if you pay a higher amount, you must pay the difference within 30 days of getting your offer accepted. 
• Periodic payment – send in 20% of your offer with your application. Then, on the application, outline how you want to pay the rest of the offer in five or fewer payments over the following 12 months. 

Typically, the sooner you pay your offer, the lower it will be. For instance, most lump sum offers are lower than periodic payment offers. Similarly, if you wrap up the periodic payments in five months, you'll generally get a lower offer than if you spread it out over 12 months. 

What to expect when you apply

After you submit the application, penalties and interest will continue to accrue on your account. If you're currently on a payment plan, you can stop making payments while the OTR reviews your offer -- however, if they reject your offer, you must resume making payments within 30 days. 

Processing time varies. If the OTR believes your offer is too low, they'll typically send you a counteroffer. However, they may deny your application -- unfortunately, you can't appeal a rejected offer. You only have one chance when you apply, and the OTR will keep any downpayments you made and apply them to your balance due.

If the OTR accepts your offer, you must pay within 30 days. 

Post-offer compliance requirements 

As part of your settlement offer, you agree to stay compliant with OTR tax regulations for the next five years. If you miss a payment or fail to file a return during this time, the OTR can retroactively rescind your offer and demand payment in full for that tax liability. 

What to do if the OTR rejects your offer in compromise

If the OTR rejects your offer in compromise, they will keep all of the payments you submitted and apply them to your tax due. Then, they can start involuntary collections on the remaining balance. That means they can garnish wages, levy bank accounts, or seize assets. 

To prevent those actions from moving forward, you must make arrangements on your account. For most taxpayers, the best option is an OTR payment plan. The OTR generally accepts payments on tax debts up to $100,000 if you can afford to pay off the balance within 48 months. 

Tips for success

You can't appeal a rejected offer, so you have to make your application count. To improve your chances of success, keep these tips in mind:

• Use accurate information for asset values -- when valuing your assets, you must use the current market value, which is the asset's value if you sold it to someone at arm's length.
• Only include necessary expenses -- this includes housing, utilities, food, and healthcare expenses. It doesn't include public or private school tuition. Generally, the business application should include all business expenses.
• Don't include unsecured liabilities -- only list loans tied to collateral. Don't include credit card payments or other unsecured liabilities. 
• Review your application carefully – missing information can cause the OTR to deny your application. Review it carefully to ensure that you haven't made any mistakes and that you've clearly represented yourself and made a strong argument for your case.
• Work with a tax professional – it's hard to get an offer approved. To protect yourself and to minimize the chance of rejection, you should work with an experienced tax professional.

How a tax professional can help you

A tax professional can help you determine if you're a good fit for an offer in compromise. If not, they'll help you apply for other options. They'll help you draft the paperwork in the most effective way possible to make your case, and they'll communicate with the OTR on your behalf. 

If you're already facing collection actions, such as tax liens, wage garnishments, or asset seizures, they can help to stop or minimize the threats of those actions. Then, they can help you apply for your offer. 

FAQs about the OTR offer-in-compromise program

What happens to tax refunds?

The OTR will apply your tax refunds to your tax debt. You cannot include tax refunds when you apply for your offer. The OTR may also be able to seize IRS refunds and apply them to your debt, but only if you don't owe the IRS anything. 

What if I pay an offer with my retirement account?

If you cash out a retirement account to pay your OTR settlement, you may incur a tax liability on the retirement account. Be careful if you take that route, as incurring a new tax bill can cause your offer to go into default. Talk with a tax professional – they can help you understand how much you're going to owe and minimize the effects as much as possible. 

Can I apply for an offer without my spouse?

If you and your spouse owe a joint debt to the OTR, you can apply for a settlement on your own for your portion of the tax debt. Your spouse does not have to apply. 

Can you apply for an offer in compromise online?

At the time of writing, no, you cannot apply for an offer from the OTR online. You can only apply online or directly through a CEA employee. 

Find help now using TaxCure.

You do not have to navigate this on your own. You can use TaxCure to help you find an experienced tax professional. Start your search now and use the filters to narrow down the results so that you find a pro with the experience you need. Don't wait – get help and put your tax troubles behind you now.