If your finances cannot meet the debt owed to the IRS, an Offer in Compromise may help your dire financial situation. The IRS can be persistent, but they also offer tax relief options when you genuinely need it.
What is an Offer in Compromise?
If a taxpayer finds that they’re unable to comfortably pay the requisite tax debt owed to the IRS, they can apply for an Offer in Compromise: where the IRS agrees to settle the debt for less than the full amount owed to it. This agreement is usually worked out in a way that suits both the taxpayer and the IRS.
Filing for an Offer in Compromise
To apply for the Offer in Compromise, you’ll need to file and include the following:
- Form 433-A or 433-B, for individuals and businesses, respectively
- Form 656(s) – individual and business tax debt (Corporation/LLC/Partnership) must be submitted on separate Form 656;
- $186 application fee (non-refundable); and
- Initial payment (non-refundable) for each Form 656. (see below)
How is the initial payment determined?
The amount required for the initial payment will depend on the payment type chosen. You have two options available to you:
Lump Sum Cash: You can opt to pay 20% of the total offer amount, and once you’ve received the written acceptance of your offer from the IRS, you can pay the remaining amount in five or fewer installments
Periodic Payments (Installments): You submit your initial offer, and while the IRS considers your case, you continue to make monthly payments towards your debt. Once you’ve received the acceptance, you continue paying the installments until you’ve paid off your debt in full.
Exceptions for Low Income Certification
If you or your household meets the Low Income Certification guidelines:
- You need not include the application fee or initial payment with your offer.
- If you opted for the periodic payments option, you need not pay the monthly installments while the IRS considers your case.
Offer in Compromise Eligibility
The IRS doesn’t just grant this compromise to anyone that applies for it. Upon filing your offer, the IRS will need to verify the legitimacy of your financial status to ascertain if you really are eligible for the offer or if you’re trying to skirt around paying your tax debt in full, aka tax fraud.
The IRS will check and consider your current circumstances including:
- Your ability (or inability, rather) to pay the debt
- Your current income
- The necessary expenses you incur in your daily life
- Your asset equity, where your assets are evaluated to determine the collection potential on each of them
Before you file for compromise, you should ensure that:
- You have filed all the tax returns you are legally required to file
- You’ve received a bill for at least one tax debt
- You’ve made all the estimated tax payments for the current year
- You’ve made all federal tax deposits for the current quarter, if you’re an employer
If you’ve checked off all of the above requirements, you can confirm your eligibility with the OIC Prequalifier, and draft the proposal for the OIC.
Offer in Compromise Ineligibility
You are ineligible for the Offer in Compromise status if you:
- Are currently in an open bankruptcy proceedings, under which circumstance your inability to pay the tax debt is considered part of those proceedings.
- Have failed to file all the tax returns you are legally required to file for that year.
If you haven’t filed all the required tax returns, the IRS will return your offer to you, and the initial payment you made will be applied to your tax debt.
IRS Consideration Procedures
- All your non-refundable payments will be applied to your tax debt; you can determine to which tax year or tax debt you want those amounts to be applied to.
- The IRS can file a Notice of Federal Tax Lien (NFTL) on your property, current and future. This is to establish the priority of the IRS’s claims over any claims that any creditors may have on your property.
- Other debt collection activity will be suspended
- The IRS may extend your legal assessment and collection period.
- You are not required to make payments on any existing installment agreement.
- If the IRS cannot make a determination within two years of the receipt of the offer, the offer will automatically be accepted.
Acceptance of Offer In Compromise – Next Steps
You should abide by the terms and the amount determined in Section 8 of Form 656
You should file all tax returns and payments legally required by the IRS
Any refunds due within the calendar year in which your OIC offer is accepted will be applied to your debt.
The NFTL filed by the IRS will be withdrawn only after you’ve fulfilled all the terms of the OIC.
Rejection of OIC
You can file an appeal to the IRS to reconsider your offer using the Request for Appeal of Offer in Compromise – Form 13711.
Hire a tax professional to help you navigate the complications of an Offer in Compromise.