Settling Tax Debt with an Offer in Compromise
Is your tax bill more than you can afford? If you can’t pay the taxes you owe all at once–or with a payment agreement–you may qualify for an Offer in Compromise.
An Offer in Compromise allows you to settle your tax debt for less than you owe. If paying the full amount of your taxes will create financial hardship, this may be a great tax relief option for you.
An Offer in Compromise is not for everyone. Before pursuing this option, you want to make sure you meet the requirements.
Eligibility for an Offer in Compromise
An Offer in Compromise is designed for those who cannot pay their entire tax bill. This includes settling your debt with installment payments or equity in assets.
Before an Offer in Compromise is even considered, be sure that you have:
- Filed all your tax returns
- Received a bill for at least one tax debt included in your offer
- Made required estimated tax payments for the current year
- Made all required federal tax deposits for the current quarter (if you own a business)
Make sure you meet all these requirements. If you don’t, your application and the application fee will be returned without further consideration. Any initial payment you sent with your offer will be applied to your tax debt.
Also, if you or your business is in an open bankruptcy proceeding, you are not eligible to apply. The resolution of your tax debts usually takes place as part of your bankruptcy settlement.
Finally, make sure any open audit or outstanding innocent spouse claim issues are resolved before filing for an Offer in Compromise.
Applying for an Offer in Compromise
You will need a few things to successfully submit your Offer in Compromise application. They include:
- Form 656, Offer in Compromise
- Completed and signed Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals (if applicable)
- Completed and signed Form 433-B (OIC), Collection Information Statement for Businesses (if applicable)
- The application fee of $205. It may be waived if you meet the Low-Income Certification Guidelines.
- An initial offer payment based on the payment option you choose. This also may be waived if you meet the Low-Income Certification Guidelines.
You could find all the necessary forms in the Form 656 Booklet, Offer in Compromise.
Choosing a Payment Option
As you are completing the application process, you will need to decide which payment option you want to do. This will also determine what your initial payment will need to be.
Your options include:
- Lump Sum Cash: Twenty percent of the total offer amount needs to be paid when submitting your offer. The remaining balance needs to be paid in 5 or fewer payments up to 5 months from the date the offer is accepted.
- Periodic Payment: You make the first installment payment with the offer. The rest of the balance needs to be paid monthly within 6 to 24 months.
If you choose the periodic payment option, you need to keep making monthly payments while the IRS considers your offer. If you don’t make the payments, the IRS will reject your offer. You will not be able to appeal this decision.
Completing the Application
Follow these steps to get your Offer in Compromise application package completed and sent for review.
Gather Your Information
Collect any information that helps you calculate an appropriate offer amount. This includes financial information about cash, available credit, investments, income, assets, and debt.
You will need to establish your household’s gross monthly income. This includes the incomes of all those who contribute money to pay household expenses like rent, utilities, groceries, etc.
In general, the IRS won’t consider expenses for college, private school tuition, charitable contributions, and other unsecured debt payments as part of expense calculations.
Providing detailed financial information is very important. It allows the IRS to evaluate your offer accurately. The ultimate goal of a successful Offer in Compromise is suiting the best interests of you and the IRS. The IRS determines an appropriate offer based on your true ability to pay.
Complete the Appropriate Forms
Fill out Form 433-A (OIC) if you are an individual wage earner, sole proprietor, or are authorized to submit an offer on behalf of a deceased individual’s estate.
Fill out Form 433-B (OIC) if your business is a Corporation, Partnership, or LLC.
These forms assist in the calculation of an appropriate offer based on assets, income, expenses, and future earning potential.
You also have the opportunity to provide a written explanation for any special circumstances that affect you or your business’s financial situation.
Finally, fill out Form 656. This form identifies the tax years and the type of tax you want to compromise. It also states your offer amount and the payment terms.
Attach Required Documentation
At the end of each form, there is a list of required documents to include. Photocopy each necessary document and include it in your application. Do not send original documents to the IRS.
Include Initial Payment and Application Fee
You need to include two separate checks, cashier’s checks, or money orders with your application.
- The $205 Application Fee
- Your initial payment based on the payment option you chose
You can also pay using the Electronic Federal Tax Payment System (EFTPS).
If you meet the Low-Income Certification Guidelines, you DO NOT need to send any money.
Mail Your Application
Before you get your application package ready for mailing, photocopy all documents. Keep these copies for your records.
Review the Application Checklist on page 29 of the Form 656 Booklet, Offer in Compromise to make sure you’ve included all the necessary information.
Mail the completed application package to the appropriate IRS facility. It’s a good idea to send it by Certified Mail so you have a record of the date it was mailed.
What Happens Next?
The IRS will contact you after they receive and review your Offer in Compromise application. If they request any more information, send it by the specified deadline. Don’t miss this deadline. Your prompt response will ensure the offer isn’t rejected without appeal rights.
If your offer is accepted, be sure to file all tax returns and pay all estimated tax payments on time. Any late payments or tax filings in the next five years of the accepted offer could result in a default. This means you will be liable for the original tax debt and accrued interest and penalties (minus the payments you made).
If the IRS rejects your offer, you have 30 days from the date of the rejection to request an appeal. Don’t delay your appeal. After 30 days, the appeal will not be accepted.
Need Help with Your Offer in Compromise?
Let’s be honest…this can be a lot of work. Not providing the necessary paperwork or missing a deadline could be the difference between paying your entire tax debt and settling for a much more manageable amount.
If you have the time and mental bandwidth to handle an Offer in Compromise on your own, the information provided in this article is a solid foundation to get started.
But you don’t have to do it alone…
Tax relief experts that understand the complexities of tax codes and IRS procedures can help you set up an Offer in Compromise that gets accepted.
You can get peace of mind knowing your tax issues are being handled by professionals that deal with the IRS every day.
The team at Confidential Tax Relief is ready to help.