Ways to Settle Your Tax Debt (Part 2): Offer in Compromise

Is your tax debt more than you can pay? Are you trying to find a way to settle your tax issues in a more manageable way?

There’s good news…the IRS is willing to work with you.

In part 1 of this series, we talked about applying for short or long term payment plans. This may be a good option for some–especially if they feel they could pay off their tax debt in a certain amount of time.

But what if your tax debt is overwhelming? You have no idea how you can pay it without significant financial hardship? 

It may be time to consider making an Offer in Compromise to the IRS.

Understanding an Offer in Compromise

An Offer in Compromise is an agreement between you and the IRS that settles a tax debt for less than the full amount owed.  

In 2011, the IRS began the Fresh Start program to help struggling taxpayers. Since then, they have expanded the program by adopting more flexible Offer in Compromise terms. 

The IRS understands that many taxpayers are struggling. They put in place common-sense changes to the Offer in Compromise program that more closely reflects real-world situations. 

Am I Eligible for an Offer in Compromise?

The IRS generally approves an Offer in Compromise when the amount offered is the most they can expect to collect in a reasonable period of time. The goal of an Offer in Compromise is to reach an agreement that suits the best interests of both you and the IRS. 

To do this, the IRS takes into consideration your unique situation and circumstances when considering your offer. This includes your:

  • Income
  • Expenses
  • Asset Equity
  • Ability to Pay

During the application process, you will need to describe your financial situation in detail and provide the documentation to support your case.

Important Eligibility Requirements BEFORE Starting Your Application

Before you even consider applying for an Offer in Compromise, you must:

  • File all tax returns you’re legally required to file
  • Receive a bill for at least 1 tax debt included in your offer
  • Make all required estimated tax payments for the current year
  • Make all required federal tax deposits for the current quarter (if you are a business owner)
  • Not be in an open bankruptcy proceeding

If you don’t meet these requirements, your application will be returned without further consideration. You cannot appeal this decision. Also, any money sent as your initial payment will be applied to the tax debt.
Unsure if you are eligible? You could start by using the Offer in Compromise Pre-Qualifier tool to confirm your eligibility and get started on a preliminary proposal.

Applying for an Offer in Compromise

The easiest way to get all the forms for your Offer in Compromise application is by downloading Form 656B, Offer in Compromise Booklet. There you will find:

  • Form 433 (OIC) for individuals or 433-B (OIC) for businesses
  • Form 656, Offer in Compromise
  • An Application Checklist to make sure you complete the application process correctly

The application also requires a $205 application fee that is non-refundable. In addition to the application fee, you will be required to pay an initial payment. Your initial payment will depend on the payment option you choose in your Offer in Compromise application. 

If you chose the lump sum cash option, you need to submit an initial payment of 20% of your offer. If your offer is accepted you will need to pay the rest of the amount in five or fewer payments.

If you chose the periodic payment option, you need to send your initial installment payment with the application. Once accepted, keep paying monthly until everything is paid in full.

Once all your paperwork is complete, make copies of EVERYTHING for your records. Be sure you send copies–NOT originals–of the documents used to support your financial situation and circumstances to the IRS.

Mail the application package to the appropriate IRS facility. The Application Checklist in Form 656B, Offer in Compromise Booklet will tell you where to send it. 

Consider using certified mail. That way you have a receipt of when you sent these documents and when they were received by the IRS.

After You Send Your Offer in Compromise Application

The IRS will evaluate your offer. Continue to make all required payments as if your offer has been approved. That being said, you are not required to make payments on an existing installment agreement (payment plan) while the IRS considers your Offer in Compromise. 

Meanwhile, your non-refundable initial payment and application fee will be applied to your tax debt. A Notice of Federal Tax Lien may be filed, but other collection activities are suspended. 

Make sure you reply to any requests for additional information before the specified deadline.

What to Do After the IRS’s Offer in Compromise Decision

If the IRS accepts your offer, keep making payments. Make sure you remain compliant by paying all estimated tax payments and filing all required tax returns. You will need to file tax returns and pay any future tax debts on time for the next five years. Failing to do this may default your compromise–you will have to pay the original tax debt, accrued interest, and penalties (minus payments you’ve made). 

If the IRS rejects your offer, you may appeal within 30 days using Form 13711, Request for Appeal of Offer in Compromise.

Get Started Settling Your Tax Debt

When dealing with the IRS, time is not on your side. Procrastinating or ignoring the problem is only going to make things more complicated–and costly. 

Use this resource (and the links provided) to get started on your Offer in Compromise now.

Not sure what to do next? 

This is a lot of information to take in, especially if you don’t have a background in finance or tax codes. And, of course, you want to make sure you do everything perfectly so your Offer in Compromise has a better chance of being accepted. 

Feeling overwhelmed? There are tax relief professionals that can handle the application process and all communications with the IRS. 

Imagine…The peace of mind knowing your IRS problems are being handled by individuals that fully understand the Offer in Compromise process–and so much more about tax relief!

If you want help filing your Offer in Compromise, schedule a phone consultation with the team at Confidential Tax Relief. We work with the IRS every day–we have your back when it counts the most.