IRS Offer in Compromise – A Path to Resolving Tax Debt
An IRS offer in compromise is an agreement between a taxpayer and the IRS that settles a tax debt for less than the full amount owed . The program provides eligible taxpayers with a path toward paying off their debt and getting a “fresh start.” The ultimate goal is a compromise that serves the best interest of both the taxpayer and the IRS .
What Is an Offer in Compromise?
An offer in compromise allows taxpayers to settle their tax debt for less than the full amount when they cannot pay the full amount or when doing so would create economic hardship . To be considered, you must make an appropriate offer based on what the IRS considers your true ability to pay.
Submitting an offer application does not ensure that the IRS will accept your offer. It begins a process of evaluation and verification by the IRS, taking into consideration any special circumstances that might affect your ability to pay .
Eligibility Requirements
Before you submit an offer, you must:
File all tax returns you are legally required to file
Make all estimated tax payments for the current year
Make all required federal tax deposits for the current quarter if you are a business owner with employees
If you or your business is currently in a bankruptcy proceeding, you are not eligible to apply for an offer .
Types of Offers
Doubt as to Liability – If you have a legitimate doubt that you owe part or all of the tax debt, you will need to complete Form 656-L, Offer in Compromise (Doubt as to Liability) .
Doubt as to Collectibility – For taxpayers who owe the debt but cannot pay the full amount based on their assets, income, expenses, and future earning potential.
Application Process
The application requires you to describe your financial situation in detail . You will need to:
Gather information about your financial situation, including cash, investments, available credit, assets, income, and expenses
Complete Form 433-A (OIC), Collection Information Statement for Wage Earners and Self-Employed Individuals
Complete Form 433-B (OIC), Collection Information Statement for Businesses (if applicable)
Complete Form 656, Offer in Compromise
Pay the $150 application fee and initial down payment (unless you qualify for Low Income Certification)
Payment Options
Payment Option 1 – Requires 20% of the total offer amount as a down payment, with the remaining balance paid in five or fewer payments .
Payment Option 2 – Requires the first month’s payment as a down payment, with monthly payments continuing while the IRS evaluates your offer. Failure to make regular monthly payments will cause your offer to be returned .
Important Facts About Offers in Compromise
Penalties and interest will continue to accrue during the offer evaluation process
The IRS may file a Notice of Federal Tax Lien anytime during the evaluation process
The IRS will keep your tax refund for the tax year the offer is accepted
If your offer is returned or not accepted, any required payments made with the filing of your offer will not be refunded
After Offer Acceptance
If your offer is accepted, you must continue to timely file and pay your tax obligations . If you fail to file and pay required tax returns during the five years after your offer is accepted, your offer may be defaulted. If your offer is defaulted, all compromised tax debts will be reinstated .
Doubt as to Liability Offers
If you are filing an offer based on doubt as to liability, you will need to complete Form 656-L. This form is not included in the standard Form 656 booklet and can be requested by calling the IRS toll-free number at 1-800-829-1040 or by visiting a local IRS office or www.irs.gov .
At Nova Tax & Accounting Services , our expert tax solutions team can help you evaluate whether an offer in compromise is right for your situation and assist with the application process. Schedule your free consultation today.