OFFER IN COMPROMISE IRS
If you are behind on your federal tax payments, you may receive an offer in compromise from the IRS. Learn more about this tax settlement option.
WHAT IS AN OFFER IN COMPROMISE WITH THE IRS?
An offer in compromise is a settlement agreement between the IRS and a taxpayer. The IRS determines how much the tax debt a taxpayer owes and offers to accept less than what is owed.
This type of agreement is an alternative to going through the lengthy process of filing for bankruptcy. The IRS will consider any offer of compromise if it believes that it’s a reasonable solution for both parties involved.
In order for an offer in compromise to be accepted, it must include all delinquent tax liabilities, interest, and penalties from the original return filed with the IRS as well as any other returns filed with the IRS after that date. In addition, any other unpaid taxes such as state or local taxes must be included in the offer.
The IRS will not accept an offer if there are other outstanding debts such as child support or student loan.
REASONS FOR THE OFFER
Here are the reasons based on which the IRS will accept an OIC.
- The IRS may accept a compromise if there is any doubt as to the liability.
- If there is a doubt that the amount owed is fully collectible, the IRS may accept a compromise.
- The IRS can accept a compromise based on Effective Tax Administration, according to which if there is no doubt that the tax is legally owed and the full amount can be collected, but receiving it in the full amount would create an economic hardship.
In many cases, the IRS may not accept the OIC if the amount offered by a taxpayer is equal to or greater than the reasonable collection potential, which includes a value that can be realized from the taxpayer’s assets, including property and less certain amounts allowed for basic living expenses.
WHAT IS AN APPROPRIATE OFFER IN COMPROMISE WITH IRS
An Offer in Compromise is a settlement agreement between a taxpayer and the Internal Revenue Service. It is an alternative to going through bankruptcy or payment plans. The IRS will accept an Offer in Compromise if the taxpayer’s debt is below a certain threshold.
In order to be eligible for an Offer in Compromise, you must have a low income and be unable to pay your debt over time. You must also be willing to give up property that you own, such as your home or car, and aren’t in an open bankruptcy proceeding.
The IRS will reject your offer if they believe that you have the ability to repay your debt over time or if they believe that you are hiding assets from them.
HOW TO APPLY FOR OIC WITH IRS?
There are three main steps for the application of OIC with IRS.
Step: 1- Submit Forms
Complete the most current version of Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, and Form 656, Offer in Compromise. If you are submitting the form based on doubt as to liability, you may submit Form 656-L, Offer in Compromise (Doubt as to Liability), instead of Form 656.
Step: 2- Application Fee
The taxpayer shall pay an application fee for the amount mentioned on Form 656, which should not be combined with any other tax payments. There are two exceptions.
- If the OIC is based on doubt as to liability, no application fee will be required.
- If the taxpayer is an individual qualified for the low-income exception, the IRS won’t charge any application fee.
Once you are done with the application filing process, the IRS can suspend collection activities. Before November 1, 2021, the IRS could keep your tax refund and apply it to your tax debt included in your offer.
Step: 3- Make Payments
The taxpayer would pay the offer amount, and there are two options for them. They can either pay in lump sum cash, which entails five or fewer installments within five or fewer months, OR in periodic payment offer payable in 6 or more monthly installments within 24 months after offer acceptance.
If you have not filed federal tax returns and haven’t made the required estimated tax payments, it will not consider your offer.
HOW MUCH SHOULD I OFFER IN COMPROMISE TO THE IRS
A compromise is an agreement between two parties where one party makes some concessions to the other. The IRS has a program for people who owe back taxes and can’t pay. This program is called Offer in Compromise (OIC).
If you owe back taxes and can’t afford to pay them, you may be eligible for a reduced payment through an Offer in Compromise. You can make a reduced offer of what you think the tax liability should be.
The IRS will review your offer and decide if they’ll accept it. If they do, they’ll stop collection efforts on the debt. But you have to make sure your offer is paid in full and abide by the terms you have agreed to. You also must be current with filing and paying all required taxes for five years from the date the offer is accepted.
HOW TO GET IRS TO ACCEPT OFFER IN COMPROMISE
One of the most common reasons for an Offer in Compromise is when someone owes more than they can afford to pay. The IRS will usually approve an offer if the person has no assets or income to pay off their debt.
The IRS will not accept offers in compromise if the taxpayer is still making money, has assets that can be liquidated, or is hiding assets.