Go-To Guide To An IRS Offer In Compromise
The fact that you find yourself here reading this page likely means that you are in a position that you would rather not be in. Indeed, owing more federal income tax than you are realistically able to afford is not a pleasant set of circumstances for anyone to find themselves in. However, just because the outlook may initially look dismal does not mean that all hope is lost. In fact, your hope may very well come in the form of an IRS Offer In Compromise. Let’s take a look at what this entails, as well as answer some of the most commonly asked questions on the topic.
What Is An IRS Offer In Compromise?
In a few words, this is pretty much as close as anyone is going to get to total IRS debt forgiveness. Let’s break it down to understand why we say so.
Why Not Paying Your Tax Bill Gets You Into A Pickle
Paying your tax bill is what saves money in the long term. It’s because when you pay on time you are not stung with IRS interest and penalties on overdue payments. This means that when you are struggling to pay the tax that is in your name or that of your business, avoiding the situation is only going to mean that things will get worse, and often they do so pretty quickly. It can even get to the point that the IRS will put a federal tax lien against your home if you own one.
When the situation is especially difficult, an Offer In Compromise can be an excellent option.
Who Can Qualify For An Offer In Compromise?
Just because someone may ask for an Offer In Compromise from the IRS certainly does not mean that they will automatically get one. To put things into perspective, in a recent year the IRS only accepted 25,000 of the 62,000 Offers In Compromise received. Indeed, the chances can be quite slim if we are honest.
Three sets of circumstances exist where the IRS will consider an Offer In Compromise, allow us to detail each of these now.
Doubt Related To Liability
This accounts for situations where there is a question mark over how much you owe or indeed if you even owe anything. The situation needs to be genuine to be considered.
Doubt Related To Collectability
This applies to situations where the IRS has reason to believe that your tax debt may not be fully collectible, for instance where the income and assets that you have do not equal the total amount of tax that you owe.
Effective Tax Administration
In these situations, there is not a question mark over how much you owe and whether the IRS can collect it, however, there is a recognition that paying in full would cause financial hardship. Another set of circumstances that fall under this category are situations that are seen as exceptional and IRS collecting the full amount would be deemed as unfair.
As well as fitting into one of the above three mentioned categories for an offer to be accepted there are other requirements that would need to be met. These are as follows:
– All legally required tax returns have been completed
– You (or your business) are not in proceedings for an open bankruptcy
– A minimum of one bill has been received by you for tax debt and is included in the offer.
– The IRS is not in receipt of an open audit or outstanding innocent-spouse claim related to you.
– Where applicable, you have completed all required estimated tax payments that relate to the current year.
– Your case has not been referred to the Department of Justice by the IRS.
How Do You Apply For An Offer In Compromise?
If you have reviewed all of the information above and feel that you may qualify for an Offer In Compromise you need to carefully analyze the Offer In Compromise booklet, as well as Form 656. It can certainly be worthwhile to enlist the services of a tax professional to walk you through the process and give you guidance to aid you in making your request.
How Do The IRS Determine The Offer Amount?
It is actually you, as the taxpayer that makes the offer to the IRS using Form 656. Of course, you do not pull a figure from the sky in doing so.
Normally, the IRS will expect a figure that is at least equal to your assets, they will also expect the offer to include future income with your basic living expenses deducted.
The IRS may need you to complete another form to help in the process, this is called Form 433-A. The details you put on this form will help them to understand your financial situation so that they can determine your ability to pay outstanding tax debts.
Ultimately, the IRS is trying to determine your ‘reasonable collection potential’, they may carry out a lot of math to do so and request plenty of information from you.
What Is The Application Fee And Initial Payments?
Usually, the fee that you will need to include with your application is $186. However, you may be able to have this waived if you meet the low-income certification guidelines. Situations of doubt related to your liability may also allow for the fee to be waived.
The Takeaway On An IRS Offer In Compromise
When you can’t afford to pay your tax bill it can feel more than a little stressful knowing where to start in overcoming the situation. Whilst Offers In Compromise can be hard to get, they are certainly an option for those that qualify. If you feel that your situation makes you eligible it is vital to take the time to fully understand the process and to look for help if necessary so that you can complete it to your full potential. Indeed, there is no doubt that the sooner you get started the sooner you can get your financial situation back on track.