An offer in compromise allows you to settle your tax debt for less than the full amount you owe. It may be a legitimate option if you can't pay your full tax liability, or doing so creates a financial hardship. The IRS considers your unique set of facts and circumstances:
- Your Ability to pay;
- Your Income;
- Your Expenses; and
- Your Asset equity.
Generally, an offer in compromise is approved if the amount offered represents the most that the IRS can expect to collect within a reasonable period of time. The IRS has ten years to collect and you want to make sure that you are aware of the time limitation, time lapsed, and time remaining before exploring any options to settle your tax debt. Some of the options would play against you by resetting the timer on the statute of limitation.
Make sure you are eligible
Before the IRS even considers your offer, you must be current with all filing and payment requirements. If you have unfiled tax return, those need to be filed prior to consider preparing and filing an offer in compromise. Also, if you are self-employed, make sure that you are up-to-date with your quarterly estimated tax payments. You are not eligible if you are in an open bankruptcy proceeding.
Select a payment option
Your initial payment will vary based on your offer and the payment option you choose:
- Lump Sum Cash: Submit an initial payment of 20 percent of the total offer amount with your application. If your offer is accepted, you will receive written confirmation. Any remaining balance due on the offer is paid in five or fewer payments.
- Periodic Payment: Submit your initial payment with your application. Continue to pay the remaining balance in monthly installments while the IRS considers your offer. If accepted, continue to pay monthly until it is paid in full.
If you meet the Low Income Certification guidelines, you do not have to send the application fee or the initial payment and you will not need to make monthly installments during the evaluation of your offer. See your application package for details.
Understand the process
While your offer is being evaluated:
- Your non-refundable payments and fees will be applied to the tax liability (you may designate payments to a specific tax year and tax debt);
- A Notice of Federal Tax Lien may be filed;
- Other collection activities are suspended;
- The legal assessment and collection period is extended;
- Make all required payments associated with your offer;
- You are not required to make payments on an existing installment agreement; and
- Your offer is automatically accepted if the IRS does not make a determination within two years of the IRS receipt date.
If your offer is accepted
- You must meet all the Offer Terms listed on Form 656, including filing all required tax returns and making all payments;
- Any refunds due within the calendar year in which your offer is accepted will be applied to your tax debt;
- Federal tax liens are not released until your offer terms are satisfied.
If your offer is rejected
- You may appeal a rejection within 30 days.
If you would like to know your options, please contact us for a free consultation. Whether you retain our services or not, you will still have a clearer idea about what you need to do and the IRS' collection process.