If you are unable to pay what you owe in taxes, or if paying would create a financial hardship for you, the IRS may consider what is called an “offer in compromise” to settle your tax debt. Essentially, the IRS is sometimes willing to settle your debt for the amount they could actually expect to collect over a reasonable period of time.
When considering an offer in compromise, the IRS will look at the unique facts and circumstances of your case, including:
- Your income
- Your expenses
- Your ability to pay
- Your asset equity
Who is eligible for an offer in compromise?
In order to be eligible, you must have filed all required tax returns and made any required estimated payments. This policy doesn’t apply to the current year if you have a valid extension on file. You are not eligible for an offer in compromise if you have a pending bankruptcy.
If you want to ensure you are eligible and develop an initial proposal for an offer in compromise, you can use the IRS’s Offer in Compromise Pre-Qualifier online.
Your offer in compromise can pay off or pay down your tax debt
You will need to file Form 433-A (OIC) if you are an individual or Form 433-B (OIC) if you are applying as a business, along with Form 656(s) and a $205 application fee, which can be waived if you meet low income certification guidelines. And, you will need to make an initial payment.
That initial payment could be a lump sum or in installments:
Lump sum: You submit an initial payment of 20% of the total offer amount and pay off the remainder of your offer in five or fewer payments
Installments: You submit an initial installment in a periodic payment plan. You continue making the monthly installments while the IRS is considering your offer and, if your offer is accepted, until the balance is paid.
In the period while your offer is being evaluated, the IRS will generally stop collections actions against you, except that you may still receive a notice of federal tax lien. If you receive a refund within the same calendar year, it will be applied to your tax debt. Any tax liens will be released once you have satisfied the terms of your offer in compromise.
If the IRS does not notify you that your offer in compromise is accepted or rejected within two years, it is automatically accepted.
If your offer is rejected, you can make a new offer or appeal the IRS’s decision to reject your offer.
How do you know how much to offer?
Ask an experienced tax attorney who has handled offers in compromise before. A tax lawyer can help you determine what a reasonable offer in compromise looks like and help you minimize your ultimate tax liability.