Many people end up owing the IRS for many reasons and there are various options to resolve your tax debt. Some of the options include an offer in compromise, installment agreement, or currently non-collectible status.
What is an Offer in Compromise?
An offer is when a taxpayer and the Internal Revenue Service settle a taxpayer’s tax liabilities for less than the full amount owed.
Who Qualifies for an Offer in Compromise?
Taxpayers who can fully pay the liabilities through an installment agreement or other means, generally will not qualify for an offer in compromise in most cases. To qualify for an offer, the taxpayer must be current on filings and made deposits for the current year.
The taxpayer should use the pre-offer qualification screening that can be found on the IRS web site. A taxpayer should not make an offer unless there is a possibility of being accepted.
Getting Your Offer in Compromise Accepted
There are several reasons for the IRS to accept an office in compromise:
- Doubt as to liability, meaning there is doubt as to existence, or doubt or disagreement as to the amount of the tax owed.
- Doubt as to collectability. The taxpayer must be able to show they cannot pay the full balance.
- Effective tax administration. Basically, this offer is accepted in cases where it would create a hardship or be unfair and unacceptable under the circumstances.
The doubt as to liability requires Form 656-L and does not require a filing fee or financial information. However, for the other two offers use Form 656 and complete Form 433-A with your financial information. The filing fee is $205, though there are certain exemptions.
The most important step in submitting a completed Form 433-A is accuracy. It most cases, it is very difficult for a taxpayer to complete the form and it is best to get a professional to represent you. It also helps to make a good factual statement about the taxpayer’s situation and how they ended up owing the taxes.
Lump Sum or Periodic Payment Offers
To make a settlement, the taxpayer can make a lump sum cash offer or make periodic (i.e. installment) payments. While the IRS is considering the offer, the taxpayer must continue making payments on the taxes owed unless collection is suspected, which is common.
The lump sum cash offer is to be made in five or fewer payments and within five months after the offer is accepted. If the taxpayer submits a lump sum offer, you must make a 20 percent payment when the offer is made and that is nonrefundable even if the offer is rejected. Periodic or installment payments can be made over a longer period of time (e.g. 72 months).
If an offer is accepted the taxpayer must stay current for five years. If the offer is rejected, the taxpayer has the right to appeal.